Oct
25

The fall of the British pound and how to make the most of it – euGreeka read

Thanasis Gavos   Tue, 25 Oct 2016; 18:23

When we woke up to find out that ‘Brexit’ was actually a reality on June 24th, the morning after the referendum, the UK pound had also lost 10% of its value against the US dollar, and slightly less against the euro (4-6%). The pound went as low as 1.20 against the euro, down from a high of even 1.31 when a Remain vote seemed to be ahead in polls.

Some of us were lucky to be receiving money from Greece that week, as we received more pounds (around GBP800) for the EUR1,000 (or more for students – EUR5,000 per quarter) that parents or other relatives could send amid capital controls. Then life continued as normal. Rent prices did not drop as much, as UK economic data still came out strong and any repercussions from the electorate’s decision were not being felt in the real economy. Some might have noticed increased prices at their local off-licence, as small businessmen tried to outweigh losses.

On the 2nd of October, the new Prime Minister, Theresa May, announced that she would trigger article 50 by March 2017; the famous article that will officially kickstart the Brexit process. The pound then, lost again some of its value. But the turning point was on the 6th of October, when French President Francois Hollande said the UK would have to ‘pay the price’, if it chose a hard exit.

A lot of the trading in foreign exchange markets – and not just there – that takes place these days is not done by actual human beings, but by computers programmed to react to news, among other things. The so-called ‘flash-crash’ in the morning of the 7th of October started from a bad algorithm that triggered a sell-off of the UK currency as a reaction to Hollande’s remarks. As the pound was losing value, other automated trading systems were triggered and started selling the British currency, too. These systems are programmed to start selling or buying, when certain price limits are reached. The time of the crash, which was during Asian trading hours, when the European market was shut, meant that there were few actual people to limit the losses and start buying the pound again. The GBP lost 8% of its value against the dollar in just two minutes. Half an hour and big losses for investors and the UK economy later, the problem had been solved and a market correction had taken place.

Still, those who had money coming in from Greece or elsewhere that week, should have received well over GBP800 for every EUR1,000 that was sent to their bank account. Compare that to the GBP700 or less that students used to get, when their parents sent them a thousand euro and it’s a very good treat.

The pound never truly recovered, as the Brexit risk and uncertainty over how a new deal between the UK and the EU will look like, still looms over the currency.


What now?

The Bank of England’s governor Mark Carney has asked into an investigation into that flash crash. This will not reverse losses for UK businesses that lost a lot of money due to this mistake. The latter may well consider increasing their prices, while salaries are not expected to go up, unless you get a promotion.

The pound may have recovered slightly from the 1.10 level it was forming against the euro, but it is still nowhere near its 1.24 level in June. This means that you can still get around 10 pence more for every euro that you exchange into pounds. Some experts are expecting that the pound will not keep falling, as a lot of ‘bearishness’ – investors’ caution/pessimism for the currency – is already priced in the current exchange rate. Some more bearish analysts, for example at HSBC, think that the pound will reach an equal price to the euro in 2017 and a 1.10 level against the dollar.

Speaking to euGreeka, Thanos Vamvakidis of BofA Merrill Lynch, said the consensus is $1.30 for 2017, but this could change given the latest market move. He also says that economists expect the UK economy to slow down. This will justify the UK pound falling, otherwise and if UK economic data continue to come out strong, the sterling might go up again.


What can you do?

If you are receiving money from Greece or have euros that you want to exchange into pounds, then you are one of the lucky ones. If you are sending money from the UK to relatives abroad, then you will be sending them less money than you used to.

> To get the best exchange rates, avoid airport exchange bureaus and the post office, as they give the worst rates. The local exchange rate bureaus around Victoria station can give you the most pounds for your euro. You can also check on certain websites online for some of the best deals in London:
www.money.co.uk/travel-money/best-euro-exchange-rate.htm
www.compareholidaymoney.com/buy-currency/euros.php

> You can also pre-order currency online to either collect at the airport or to be delivered by post to your home address. Withdrawing money from a local ATM from your Greek bank card can also give you good rates, but beware of any transaction costs.

> When travelling abroad, always check the exchange rate of the day on your mobile phone; you can easily find that online if you ‘google’ EUR/GBP exchange rate. When you are then asked on an ATM or card payment machine, whether you would like to pay in GBP or euro, check if the exchange rate offered is similar to the market rate. Lately, people travelling abroad have bumped into some good deals.

> If you want to transfer small amounts of money, you can do this via PayPal, while Transferwise is also good in terms of low transaction costs, but you need to set up an online account, which involved going through ID verification.

> Certain other services, such as Moneycorp, allow you to send money from the UK abroad at a fixed rate for six to 24 months. So, if you think the sterling might drop further, and you have to make recurring payments abroad, this could be a good option.

> If you are thinking of making an investment, such as buying property in the UK, you will get more value for your money with a low pound and this is what many investors have done, but with the political uncertainty and risks around the British economy, this is a long bet. You never know, if the value of your investment is going to drop soon, as the property sector might be hit by a hard Brexit.


We have been bearish GBP, expecting the long uncertainty, the pro-active BoE and thelargevamvakidescurrent account deficit to weigh on the currency. We have continued flagging downside risks, as our flows reflect selling from both hedge funds and real money, despite data surprising to the upside. The main driver of GBP weakness has been headlines suggesting a hard Brexit (meaning no single market participation, but a new trade deal with the EU and full control on migration). It is important to note that the UK data has remained strong and keeps surprising to the upside. Oureconomists expect the economy to slow next year. This is necessary to justify the weak sterling level. Otherwise, the sterling could strengthen next year.

We have already seen some limited contrarian sterling buying from investors, while the housing sector has also been supported by the cheap currency. Such trades are contrarian, suggesting a small probability of a large profit. Moreover, it could take a while for such trades to pay off, as Brexit related uncertainty is likely to remain very high for very long.”

Thanos Vamvakidis, head of European G10 FX strategy at BofA Merrill Lynch

 

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