Why sterling may get another pounding from Brexit

Why sterling may get another pounding from Brexit
Since the U.K. voted for Brexit despite clear warnings about the damage from leaving the single market, retaining the trading pact may not be a government priority, Nomura noted.
PHOTO: AFP

The pound may have recovered from its post-Brexit lows, but it's set to face another round of Brexit heat, analysts said.

In the wake of the UK's late June vote to exit the European Union (EU), the pound tumbled to as low as $1.1450 in an October flash crash.

But the currency recovered from those 30-year lows in the wake of Donald Trump's surprise US election win, reaching levels above $1.27 in early December.

That was up from levels under $1.24 before the election results, potentially on expectations that the president-elect could pursue a "fast-track" trade deal with the UK

On Thursday at 3:23 p.m. HK/SIN, the pound was fetching $1.2361.

But analysts at Nomura said in a note Wednesday that even current levels might be overly optimistic, noting that it's very difficult to determine what the market is pricing in, especially when no one yet knows what type of agreement the UK government will secure with the EU.

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Markets are speculating on a "hard, soft, flexi and transitional Brexit," Nomura notes.

Among the issues which will determine whether the Brexit is hard, soft or in between will be whether the UK exits the EU's single market, whether free movement of people will be allowed and whether the UK's financial players will retain "passporting rights" with the continent.

Nomura noted that UK Prime Minister Theresa May was expected to issue a Brexit plan in a speech in the new year, although even that was expected to lack details.

"Our concern is that the market is too complacent and optimistic in its Brexit pricing as UK asset pricing seems to suggest the market is moving away from a hard Brexit pricing, with little concrete reason," Nomura said.

"It may be because market participants that were eligible to vote probably voted overwhelmingly to remain (in view of London's results)."

Since the UK voted for Brexit despite clear warnings about the damage from leaving the single market, retaining the trading pact may not be a government priority, Nomura noted.

"There is room for a correction on a disappointment," Nomura said, adding it could send the pound back below $1.20.

Read Also: Most Singapore-listed firms not open to Brexit risks: Analysts

Others also pointed to likely economic damage ahead for the UK.

Richard Martin, managing director at IMA Asia, told CNBC's "The Rundown" on Thursday that Brexit was a slow-moving disaster for Britain.

He expected that 2017 would start with mixed stories about the UK's economic outlook, noting that there's been a "flurry of activity" from Japanese industrialists using the pound's drop as an opportunity to buy British assets as a platform into Europe.

But Martin added, "What will become clearer as we move through 2017 is that Britain just unhooked itself from the single biggest market in the world. The European Union is a bigger market than the United States' market."

He noted that currently, products manufactured in the UK can be shipped directly to end-customers across the EU.

"As you move up to Brexit and you take Britain out of the EU, that track is likely to stop at the channel. It's going to be inspected, all the goods will have to be recertified and there may be taxes to pay and that's the end of using Britain as a manufacturing base for the European Union," he said.

"That's not a good story."

Read Also: Can the EU survive Brexit?

A great deal of uncertainty remains as the UK has yet to officially invoke Article 50 of the EU treaty, which starts a two-year negotiation period for the terms of the separation process.

Court challenges to Brexit were also continuing.

The UK's Supreme Court was likely to rule next year on whether the government needed parliamentary approval before invoking Article 50, Reuters reported recently.

That followed a decision by a lower court, the High Court of England and Wales, in early November that parliament had to make the decision, Reuters reported. That ruling had helped to support the pound.

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