British Pound to Hit 1.10 v Euro on Looming Liquidity Crunch Warns Prominent Foreign Exchange Broker

British Pound to Hit 1.10 v Euro on Looming Liquidity Crunch Warns Prominent Foreign Exchange Broker

7 April 2016, 15:23
Vasilii Apostolidi
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The pound to euro exchange rate could fall back to levels last seen in 2011 over the course of coming months warns a leading international payments provider.

  • Sterling expected to weaken by as much as 15 per cent
  • A lack of liquidity may lead to a widening in prices
  • Only a third of businesses already taking action to protect currency
  • Businesses urged to 'hedge forward'

A huge liquidity crunch looms over sterling as the EU referendum approaches, warns HiFX, a foreign exchange provider and risk management firm.

The startling news comes as the British pound embarks on the next leg lower in its now entrenched downtrend against the euro.

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The GBP/EUR is trading 1.2388 having opened the year at 1.3574.

“If the UK votes to leave Europe on 23rd June, we expect to see an aggressive weakening for sterling. The result is really uncertain and no one can call it – but the pound has already fallen in value by seven or eight per cent amid all the anticipation,” says Chris Towner, chief economist at HiFX.

The declines, that fly in the face of a growing economy and falling unempoyment, are what we refer to as the 'Brexit premium' which suggests there could be a rapid recovery in GBP once uncertainty is lifted and the market gets back to where it should be based on fundamentals.

Towner goes on to warn:

“Should the ‘leave’ camp triumph, sterling could drop by another 15 per cent in the few days immediately following the result.

"In literal terms, this translates as levels below 1.10 for GBP/EUR and levels below 1.25 for GBP/USD. Likewise if the UK remains in the EU, sterling could very quickly strengthen by about seven per cent and make up for lost ground.”

 

Dealing Around the Referendum

As the referendum approaches, liquidity in the markets will continue to wane and businesses trying to lock in exchange rates may face difficulties.

Trying to deal as soon as the outcome is known will also prove nigh on impossible.

Insight from HiFX reveals that only a third (32%) of UK businesses have already taken action to protect themselves against the risk of currency fluctuations as the referendum approaches.

Towner continued:

“Businesses dealing in sterling need to manage their risk effectively before any potential liquidity crunch – which we expect to see in the lead up to the referendum. And they need to act now. Late-comers who don’t hedge their risk soon will have to tolerate a widening in spreads and as such, should expect to pay a premium to deal, due to the enormous credit risk that the counterparty of the transaction will hold in a short period of time before the referendum.

“For example, for a business needing to buy one million US Dollars or one million Euros, could see a potential P+L swing of 220k USD or 220k EUR respectively. Businesses should look to lock in exchange rates now by taking out forward contracts and protecting themselves against the risks of choppy currency markets as June approaches.

“It’s too tight to predict whether Britain will vote ‘leave’ or ‘stay’ in the referendum, but we do know for sure that sterling is going to be illiquid and choppy in either direction depending on the result. Why risk unnecessary losses when you can do something about it now and hedge forward?” 

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