Brexit: Welcome to the “Hard” part

Hi everybody,

It was clear from the start that the Brexit wasn’t going to happen overnight and when the surprise of the referendum results wear of, some amount of calm returned to the markets. However, last friday in the asian market the pound has a 6% drop against the American dollar, and it also happened in 2 minutes. Although this situation has been extreme, the reality is the pound haven’t been able to regain its previous level since the beginning of the prime minister Theresa May statements about leaving the union.

Clearly the market expectation is not whether is going to be a Brexit, but if is it going to be a “Hard Brexit”. The term “Hard Brexit” was used by the same Theresa May in the most recent conservative party conference in order to show her stronger position in leaving the European Union (EU). This position implies a greater control of borders in order to reduce the migration from EU countries, which will lead to England leaving the European common market and the need to renegotiate new commercial accords, bringing more uncertainty of it’s trade future.

Because of its ability to adapt pretty quickly to the markets trends, the Sterling US dollar exchange rate is the perfect tool to analyze the investor’s sentiment regarding Theresa May position. The following chart shows a reduction of -6.91% in the rate going from 1.3023 to 1.2123 Sterling per US dollar between september 27 and october 11, which show a reduction in the value of the Sterling compare to the US dollar.

Made by the author. Data source Bloomberg
Made by the author. Data source Bloomberg

Even though the argument in favor of a lower exchange rate is the benefits that came from lower productions costs for exports, the truth is that this effect may be corrected by the higher prices in the imports from the EU, and eventually the cost in the new commercial accords to be settled.

What is true in this situation is that markets doesn’t look favorably the “Hard Brexit” stand made by Theresa May, however it´s no surprise that the government is taking stronger anti-migration steps in order to close its borders, after all that fear and security were the main messages of the package bought by the Brexit voters.

That’s all for today and have a great weekend!

*This post reflects the opinion of its author and must not be consider an investment recomendation

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