Credit: Shutterstock photoSo far, the vote to Brexit has been taken more or less in stride with the sharp depreciation in the British pound raising few alarms as UK equities have risen sharply, partly due to the positive impact of a weaker currency on exports. Some may call this a Goldilocks reaction to Brexit but history has shown that markets will look to inflict the most pain when given the opportunity.
This is especially true of the forex market, where last week’s flash crash in the British pound was a stark reminder of how volatile markets can get. On October 3, GBPUSD fell to a low on Reuters at 1.1491 vs. around 1.26 (nearly -9%) in a matter of minutes. Others have the low higher, some around 1.18 and others around 1.19 but you get the point. It was a flash crash that came without a news catalyst. Liquidity just disappeared. If equities were following the pound there would be talk of a currency led crisis but so far this is not the case.
In any case, the breakdown in GBPUSD after 3+ months trading within a 1.28-1.35 range, most of the activity between 1.29-1.34. has revived talk of parity. This is not just chatter vs. the US dollar but vs. the EUR as well. I wrote an article around two months asking, Is the British Pound Heading for Parity with the US Dollar? We also conducted a poll asking where the GBPUSD would be trading at year end. Only 6% saw it end the year between 1.10-1.20 and 1% expected it at 1.00-1.10.
Given the fresh weakness in GBP (EURGBP traded briefly above .92), we would like to know where you see the GBP at year end and whether you feel it will eventually trade to parity in our forex tracking poll (note we were the only poll to call the Brexit outcome correctly from start to finish).
Click to post your view on whether the GBP is headed for parity.
How long can the free ride last?
In a world where deflation is more of a concern than inflation, a weak currency gets a free ride as a rise in prices can be tolerated, even welcomed by central banks. However, it still bears watching in case the picture changes as once you take the weak currency genie out of the bottle, it is hard to get it back in without pain if the negative effects outweigh the positives.
Click to post your view on whether the GBP is headed for parity.
Jay Meisler, founder
Global Traders Association
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
