Pound sinks by most since October flash crash on 'hard Brexit' fears

A bank employee counts pound notes at Kasikornbank in Bangkok, Thailand.
A bank employee counts pound notes at Kasikornbank in Bangkok, Thailand.PHOTO: REUTERS

LONDON/SYDNEY (BLOOMBERG,REUTERS) - The pound slid below US$1.20 for the first time since October's flash crash, after reports that UK Prime Minister Theresa May will signal plans to quit the European Union's single market to regain control of Britain's borders and laws.

Sterling declined against all its major peers after the Sunday Times said May will prepare to withdraw from tariff-free trade with the region in return for the ability to curb immigration and strike commercial deals with other countries. The currency has slumped 19 per cent against the US dollar since the U.K. opted to leave the EU in June's referendum, with declines since the initial aftermath of the vote mainly sparked by concern May would pursue a so-called "hard Brexit".

The Sunday Times didn't say how its obtained the information, and the prime minister's office declined to comment on the report when contacted by Bloomberg News. Government officials told the newspaper they expect May's speech on Tuesday to cause a further "market correction."

"Even if the pound recovers somewhat in London, it seems as though the realities of a hard Brexit are still not fully priced in," said Sean Callow, senior strategist at Westpac Banking Corp. in Sydney. "It is difficult to make the case for the pound to avoid testing - probably breaking - the 'flash crash' lows in coming weeks."

The pound fell as much as 1.6 per cent on Monday to US$1.1986, the weakest level since Oct 7 when it reached US$1.1841, the least since 1985. It was down 1.2 per cent at US$1.2028 as of 9:09am in Tokyo.

Against the Singapore dollar, the pound tumbled to S$1.7125 at 4:58am, Singapore time, and was trading at S$1.7224 at 8:53am, down 1/3 per cent from its close on Friday.

The pound trimmed some of its losses after Bloomberg News reported the UK Treasury is drawing up plans to reassure investors following May's speech on Tuesday, and as US President-elect Donald Trump told the Times that he will offer the UK a "fair" trade deal.

A measure of anticipated price swings for the pound jumped when the date for May's speech was announced last week as traders sought protection against more turmoil. With details of the UK's exit strategy remaining scant less than three months before the Prime Minister's own deadline to trigger formal talks with the EU, traders have previously seen her pronouncements on Brexit as a trigger to sell the pound, even if she has mainly reiterated existing views.

Sterling fell following her speech at the Conservative Party conference in October, which fanned speculation she was eyeing a clean break with the EU, and dropped to the lowest level since October last week following her first television interview of 2017.

May's speech isn't the only approaching Brexit milestone. The Supreme Court is set to rule this month whether May or Parliament carries the power to invoke the exit, although few see the process being derailed either way.

"The pound risks a violent rally to cover short positions if the UK Supreme Court rules to support Parliament," said Naohiro Nomoto, manager of foreign-exchange trading at Bank of Tokyo-Mitsubishi UFJ in Tokyo.

The pound has previously been prone to outsized swings during Asian trading, with the most extreme being October's flash crash, which saw the currency tumble more than 6 per cent in a matter of minutes. While an investigation by the Bank for International Settlements released last week found no single cause for the event, it highlighted that the time of day played a significant role in making the market more vulnerable.

Meanwhile, regional share markets opened hesitantly on Monday with MSCI's broadest index of Asia-Pacific shares outside Japan up just 0.09 per cent. Japan's Nikkei eased 0.3 per cent, while Australia added 0.5 per cent.

The flight from sterling benefited the safe-haven Japanese yen, with the pound down 1.3 per cent to 137.57 yen while the US dollar dipped to 114.24.

Trading was erratic with currencies gyrating on very little volume. The US dollar edged up 0.2 per cent to 101.390 on a basket of currencies, while the euro pared initial losses to stand at US$1.0632.

The dollar index put in its worst weekly performance in more than two months last week as investors reconsidered the whole "reflation" trade - that Trump's promises of debt-funded fiscal spending and lower taxes would stoke inflation and drive the Federal Reserve to raise interest rates faster.

Fed chair Janet Yellen will have an opportunity to lay out her thinking with speeches on monetary policy on both Wednesday and Thursday this week.

All eyes will then be on Trump's inauguration on Friday for any clarity on his economic plans.

"The market is showing greater reluctance to push on with reflation-type trades without more details of proposed fiscal spending plans and the economic data to back it up," said analysts at ANZ in a research note.

"It looks as though more than just reasonable data will be needed to see yields and the dollar push higher again. Some decent positive surprises may be necessary for the market to gain conviction."

Asian markets are also waiting anxiously to see if Trump makes good on a campaign pledge to brand Beijing a currency manipulator on his first day in office, and starts to follow up on a threat to slap high tariffs on Chinese goods.

Analysts fret that the spectre of deteriorating US-China trade and political ties is likely to weigh on the confidence of exporters and investors worldwide.

Wall Street ended last week mixed, with the Dow off slightly but the Nasdaq at a record high.

Sentiment this week could be driven by results from the major banks with Morgan Stanley, Citibank and Bank of New York Mellon among those reporting.

In commodity markets, oil prices inched higher after shedding around 3 per cent last week. Brent crude was up 9 cents at US$55.54 a barrel, while US crude rose 7 cents to US$52.44.

Spot gold added 0.5 per cent to US$1,202.80 an ounce.

With additional information from the Straits Times