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- HSBC warn of a "tectonic" shift could be underway for Sterling
- Long-term demand for UK assets may be hit as investors "go away and don't come back"
- Markets even more pessimistic than pessimistic Bank of England
A structural shift away from the British Pound may be happening warns an HSBC economist who suggests much of the weakness displayed by the currency of late might be irreversible.
Pound Sterling is down 1.25% against the Euro and US Dollar over the course of the past give days as fears continue to simmer that the UK will tumble out of the EU on a 'no-deal' basis.
The slide in Sterling comes despite the the Bank of England (BoE) raising interest rates at last Thursday's policy meeting - a move typically associated with a rise in the currency.
Higher rates usually attract greater inflows of foreign capital with the promise of higher returns, thus boosting the currency in the process, however, due to anomalous risks associated with Brexit the opposite may in fact be happening.
Sterling has failed to move higher after the rate hike and instead has fallen to multi-month lows as Brexit fears have clouded the outlook.
And, the adjustment may be indicative of far-reaching developments in currency markets which could affect the Pound for years to come, according to one strategist.
Longer-term holders of the currency such as central banks and large sovereign funds may actually be reducing their Sterling reserves on a semi-permanent basis, as they did the Euro during the Eurozone debt crisis.
"Perhaps there are investors who are exiting Sterling. They are leaving and not coming back. So that is the challenge for Carney and the BoE - they are seeing a structural shift away from the currency and the market," says Steven Major, head of global fixed income at HSBC.
The Pound-to-Euro exchange rate is seen hovering at the bottom of a long-held range between 1.11 and 1.15 as markets break with the assumption that an amicable pro-business Brexit deal will be reached. The Pound-Dollar exchange rate meanwhile continues its resolute trend lower, showing very little respect for technical support levels.
The comments from HSBC's Major suggest the resulting investor shift may hit the Pound for a long-time potentially reducing its long-term average value and putting to bed expectations that the highs seen in years gone by will be achievable again.
Currently markets are more pessimistic about the outlook for the economy than the BoE, which is itself pessimistic, says Major, and this explains why Sterling is bucketing.
The BoE sees a 'neutral rate' - the interest rate at which the economy is neither growing nor contracting - at substantially lower than it has ever been historically, suggesting subdued growth.
"The BoE is guiding to a neutral rate that is probably half of previous cycles, so in the low twos, half of previous cycles based on hundreds of years of history - one half. And the market's thinking you are not even going to get there," says the strategist.
"And is the market wrong? the market is making a bet; a weighted probability each day based on what is the chance of a hard Brexit; and, clearly, based on the news flow, the market puts a high probability on that today which suggests rates can't go up that much further."
Market attention has shifted notably to the downside risks around Brexit during August with an increasing risk of a ‘no deal’ being seen.
The risks have recently been highlighted by comments made by Trade Secretary Liam Fox and Bank of England Governor Carney. In a BBC Radio 4 interview Carney said the chances of a 'no deal' Brexit are "uncomfortably high".
HSBC's own forecast is that the BoE will probably not raise interest rates much further.
"We are keeping our forecast on a very, very low rate - we have got 1.0% for Gilts, for example. We think the BoE will struggle to hike again, let alone once a year as the forwards are showing," says Major in an interview with Bloomberg news.
One reason put forward for the BoE increasing interest rates was that it wanted to increase them in order to have the 'ammunition' to counter any fall-out from Brexit and lower them again and whilst Major has sympathy for this view, saying, "It seems to me the only reason to put rates up is so they can be cut again latter," he does not think the BOE will increase them much further beyond the current level.
"It is the sort of Duke of York policy - you go up so you can go back down again," says Major of such an approach, which he thinks, "does sound a bit silly."
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