By ETF Heat Map Team
The Brexit vote to leave the European Union created a jolt in the markets all over the world. The U.K. economy lost momentum, but what the future hold is quite uncertain. GBP hit a 31 year low following the vote, and may near parity with the Euro.
Similar to the financial crisis in 2008 which saw a near parity situation between pound sterling and the euro. David Bloom, an analyst at HSBC, forecasts the pound sterling – euro parity by the end of 2017. According to him, the Bank of England will cut interest rates further down to 0.10% in November 2016, which will push pound sterling to fall up to parity with the euro. He is not alone in this regards as Themos Fiotakis, the London-based co-head of currency and rates strategy at UBS, believes a euro – pound parity is not far off.
The Bank of England recently responded by cutting their interest rate and expanding their monetary supply to ease the post Brexit economic impact. This had already put a distress on the pound sterling. Any further interest rate cut by the Bank of England would divert foreign investment away from the U.K., thereby depreciating the pound further
The formal Brexit talks are set to begin towards the first part of 2017, and as the talks unfold investors will get a better sense of the exit steps and its impact on the market. Currently, the U.K. faces an increasing current account deficit, as the European Union buys about half of the U.K.’s goods and services, and Brexit may lead to fall in these exports. This may further widen the current account deficit, impacting the economy.
Furthermore, major companies headquartered in London have shown their interest in relocating elsewhere. The symbolic status of London being the world’s financial center appears to be a changing reality. Companies, such as Vodafone, have shown their intent of moving elsewhere where they can manage their European operations. This would further dampen the current account deficit as investment leaves the country.
Mr. Bloom believes that the pound needs to fall in order to fill the current account deficit. A falling pound would make British exports cheaper raising their demand worldwide, which would attract foreign money hence reducing the current account deficit. However, countering the current account deficit would not be possible if the pound stays at the current level, and therefore a substantive and prolonged fall will be needed.
The timing for the pound-euro parity appear to be in the longer term, as a clear portrait is sketched of Britain separated from the European Union. However, there is a lot of uncertainty and whether the pound depreciates further or not would highly depend upon the performance of the U.K. economy. The real impact would largely depend upon how the exit talks go in the U.K.’s favor.
There are some ETF’s available to play such this scenario including:
- FXE – Guggenheim CurrencyShares Euro Trust ETF
- ULE – Ultra Euro ETF
- EUO – UltraShort Euro ETF