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Currencies

Sell before May or stay away

Unstable pound continues ahead of PM's 'hard Brexit' speech

TOKYO -- Uncertainty over the pound is looming again as Prime Minister Theresa May prepares to give a long-awaited speech on Tuesday night, widely expected to outline plans for a "hard Brexit." With no clear prospects for sterling, the overwhelming mood in the markets is one of risk-avoidance.

Market watchers have begun to see a hard Brexit as inevitable, resulting in Britain's financial services losing access to the European Union's single market. But with the lack of clarity over what form negotiations with the EU will take, market players reacted hesitantly.

On Monday, U.K. media reported May's negotiating objectives include a clean break from the EU's single market and customs union. That same day, the pound slid more than 2% in Asian markets. The pound later rose to above $1.20 in European markets, but the rebound was small.

More fluctuation of the pound is far from impossible after May delivers her speech. The currency's implied volatility on Monday shot up to almost 30% from around 10% on Friday, the highest since the Bank of England's Monetary Policy Committee met in July last year, just after the referendum.

"There is a much stronger sense of caution regarding a hard-Brexit ahead of May's speech," said Takuya Iwasaki of Bank of America. "While the pound is nearing the level of last year's flash crash, looking at the option market, the pound could drop further depending on her speech."    

Many Japanese companies expect Europe's economy to deteriorate following the U.K.'s Brexit vote.

There are uncertainties in Asian stock markets too. With U.K. profits accounting for almost 40% of overall profit, Hitachi Capital on Monday fell 4.47% from Friday. Takeuchi, a construction machinery maker with large amounts of revenue in pounds, dropped around 4%; on Tuesday, it fell more than 5%. Hitachi and Nissan Motor have both been on a weak tone since Monday. In the Tokyo stock market on Tuesday morning, there were many instances of their shares being sold as both have significant operations in the U.K. The Nikkei Stock Average briefly went below 19,000 yen for the first time in around 3 weeks. In Hong Kong, HSBC fell 1.25% on Monday.

Yet the U.K. economy continues to perform strongly. The International Monetary Fund said Monday it expects the U.K. to grow 1.5% this year, compared with the previous forecast of 1.1%. Consumption activity remains strong and sentiment data is improving, too.

After the Brexit vote, the pound dropped nearly 20%, but market watchers have pointed out certain positive aspects, such as the improved performance and exports of the manufacturing sector. On Monday, Tata Steel and Tata Motors rose 2.68% and 2.31% from Friday respectively.  

Some market watchers view that a further decline of the pound needs clear evidence showing volatility in U.K. growth, and that sterling will not continue to stay below $1.20 under the relatively sound current economy.

(Nikkei)

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