Pound on a fall regardless of EU vote

A different take on Brexit market wisdom
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Market wisdom over the course of the Brexit campaign has dictated that the pound will tumble in the event of a leave vote. The famed speculator George Soros this week warned that a vote to leave would cause the pound to fall to parity against the European single currency and the UK would end up ironically “joining the euro” after all. By the same logic, a vote to remain in the EU will shore up the value of sterling, and may even prompt a relief rally for the British currency. There is, however, an alternative view largely ignored by markets during the sound and fury of the campaign. It says the Brexit result will not be the main driver of sterling prices because the pound is poised to take a significant tumble against the dollar and euro regardless of the outcome.

The United Kingdom finds itself in the unenviable position of being the only G4 currency with a larger current account deficit now than in the years preceding the financial crisis. Russell Clark of Horseman Capital notes that while the relative valuations of currencies are driven by differences in current and expected interest rates, these rates should ultimately by driven by fundamentals such as current accounts and fiscal deficits. On both these measures the UK has sharply underperformed its G4 rivals over recent years — yet the value of the pound has yet to adjust. Compared with the eurozone, United States and Japan, the UK has had by far the largest current account deficit as a percentage of gross domestic product since the middle of 2012. At the same time the UK’s fiscal deficit has significantly worsened relative to the eurozone economies and the US.

Mr Clark believes the sharp improvement of the eurozone’s fiscal and current account positions versus the UK means the pound is likely to suffer an even sharper devaluation against the single currency than in the 2008 crisis. Sterling verses the euro peaked at €1.50 in 2007 and lost 30 per cent to its 2009 trough of €1.04. So far since reaching its most recent peak of €1.41 the pound is only down by a modest 8 per cent. Based on these facts, parity against the single currency looks an entirely plausible outcome for the pound over the next two years. As Mr Soros says, the UK may well end up “joining the euro’” but it will have little to do with the outcome of the Brexit vote.

miles.johnson@ft.com

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