The GBP/USD, or “cable” as it is nicknamed, has been the proverbial whipping boy for financial markets in recent days.
In the wake of last Thursday’s UK referendum, and subsequent decision of 51.9% of voters to leave the European Union, it has been absolutely clobbered, tanking by close to 13% from last Friday’s high to a 31-year low of just 1.3120.
That’s 19 big figures in just a tad over two full sessions of trade.
The hourly chart below tells the story.
After such an enormous selloff, it’s understandable that some believe a bounce is in order. If there’s one thing that markets have been programmed to do since the global financial crisis, it’s to “buy the dip”, often no matter the circumstances.
Not on this occasion, says Richard Grace, the Commonwealth Bank’s chief currency strategist. In his opinion, the selloff is only just getting started.
“We anticipate GBP to remain under downward pressure and keep depreciating,” wrote Grace in a research note released on Tuesday.
He outlines five factors that he believes will determine just how far the cable will potentially fall, listed below.
The extent of the depreciation in GBP/USD will depend on:
Whether oil-rich Scotland leaves the UK Whether the UK can retain, in some degree, its EU financial services passport To what degree we see capital flight and business investment contract How deep the coming UK recession is, and how large the UK current account deficit becomes, as net permanent export loss outweighs a cyclical contraction in import demand; and How much monetary easing the Bank of England implements
In his opinion, should all five factors unfold in a manner that is negative to the UK economy, Grace pulls no punches in terms of where he believes it will send the cable: Parity to the US dollar over the next five to ten years, representing a further decline of 25% from its present trading level.
Now that would be something to behold, particularly as GBP/USD traded as high as 2.12 just eight years ago.
Based on the view that the Australian dollar is likely to strengthen over the same time period, such a dramatic pound devaluation could see AUD/GBP soar by as much as 32%, says Grace, seeing it trade as high as .7350, a level that has not been seen since 1985.
While Grace acknowledges that “milder outcomes of the above five factors will result in a lessor-depreciation in GBP”, he believes that in the short-term, there is unlikely to be “very little upside” for the pound.
During the British and Irish Lions rugby tour of Australia in 2001, a series that the Wallabies won 2-1, many Australians, including myself, were subjected to taunts by many British fans about how pitiful the Australian dollar was.
“Three to one, three to one, three to one”, was the chant that was heard frequently in pubs around the country, a reference to the three Australian dollars that one UK pound bought at the time.
Oh, how the times have changed, particularly should Grace’s worse-case forecasts play out.