It appears that Great Britain might actually do the until-recently-unthinkable,
and leave the European Union. The reasons for this dramatic break-up are many,
and can be Googled easily enough. For our purposes, suffice to say that traders
are scrambling to figure out what this means for the British pound, and they're
not liking the answers. Here's a quick look at the recent foreign exchange
action:
(MarketWatch) - The pound has been clobbered this week, driven close to seven-year
lows against the U.S. dollar -- and analysts don't see any catalyst in sight
to turn that fall around.
The pound on Tuesday dropped below $1.39 against the greenback for the first
time since March 2009, hitting an intraday low of $1.3879, according to FactSet.
Sterling versus the dollar -- known as "cable" -- has lost roughly 3.5% since
Friday, when the floodgate of debate surrounding the potential exit of the
U.K. from the European Union burst open.
Investment houses have been warning that the pound could drop sharply if
U.K. voters support leaving the EU. Losses for the pound started picking
up pace after London Mayor Boris Johnson over the weekend backed a campaign
for the U.K. to leave the European Union.
Currencies don't move in a "in a straight line forever," said FxPro's Smith.
But at this point, "there is very little support between where we are now
and the lows we saw in 2009."
Hurdles: Johnson's stance is "raising concerns that he could tilt the vote
toward the 'Leave' camp," said Vincent Chaigneau, head of rates and forex
strategy at Société Générale.
The influential London mayor's position puts him in direct opposition to
David Cameron, his fellow Conservative Party member and party leader. On
Friday, British Prime Minister Cameron struck a deal with the EU to change
his country's membership terms.
The U.K. government has set June 23 as the date for an in/out referendum
on whether the U.K. should exit the EU, known as "Brexit." While the "leave" camp
is tapping into a range of dissatisfactions with the bloc in its campaign,
the need to control borders in the face of the migrant crisis is a key issue.
"The deepening of the immigration crisis in Europe is going to be at the
heart of the debate, and unfortunately it's likely that as weather conditions
improve into spring, we will see another wave of immigration," said Chaigneau.
"There's a concern that the immigration issue could make the vote very tight."
HSBC believes the currency market is pricing a Brexit at around a 33% probability,
the bank's analysts said in a report published Wednesday. "So GBP-USD could
fall by around another 15-20% should a Brexit become a reality -- in other
words, if the probability shifted from 33% to 100%," wrote currency strategist
Dominic Bunning and David Bloom, global head of FX research at HSBC.
To summarize, anyone holding a lot of British pounds is sorry they made that
choice, and a growing number of them are behaving as people have behaved for
3,000 years, retreating into the one safe haven that offers reliable shelter
from government mismanagement. In the past three months (that is, since the
Brexit debate has emerged) gold is up 22% in pound terms, and the ascent is
steepening. As the article notes, warmer weather will bring more immigrants,
sharpening the debate and keeping the outcome of the outcome in doubt -- and
making gold ever-more-attractive for Britons exhausted by the uncertainty.