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Home / Special Reports / Can you benefit from the Pound crashing?

This report is not a personal recommendation and does not take into account your personal circumstances or appetite for risk.

21 October 2016

Can you benefit from the Pound crashing?

A path to parity?

The Pound is weak. Since the UK’s vote to leave the EU end-June, Sterling is over 17% lower versus the US Dollar and a fall of 14% means it is nearing parity with the Euro. That’s right, £1 may soon get you just €1, and it could fall further according to some analyst predictions. The most extreme of which suggest that GBP/USD could edge further towards parity before the end of the year.

We’re at a crossroads, with the jury still out on where the Pound is headed.

How much will your next holiday cost?

What does this mean for you? If you’re a business owner, the chances are you may be finding prices from your supply chain have suddenly increased. Alternatively, as a consumer this may only be coming apparent to you in the last week following the ‘Marmitegate’ dispute between Tesco and Unilever. However, this might only be the beginning of similar arguments that lead to your weekly shop costing much more in the near future.

More immediately, the cost of that foreign holiday to the European continent or beyond is now almost 20% more expensive than it was a year ago. Travel, hotels, eating out: all of these will cost a pretty penny more than before. Furthermore, the pound would have to rally 25% simply to put you breakeven.

What can you do to turn Sterling weakness into a profitable opportunity? Accendo Markets offers a range of Foreign Exchange (FX) opportunities for you to benefit from movements in the Pound.

In this report, we’ll provide you with three options in which you could benefit from Pound Sterling movements in either direction in relation to its peers: speculatively trading FX rates, physically trading FX and trading FX-sensitive stocks.

Taking a Pound-ing

It began with Brexit. On the day that Britain voted to leave the EU, the UK’s currency took an almighty hit; GBP fell 5% against its European counterpart, the Euro, and lost an even greater 8% against global reserve currency the US Dollar.

More recently, comments from new Prime Minister Theresa May hinting at a so-called ‘hard’ Brexit – a total split from the EU – sent Sterling towards all-time lows when compared to a trade-weighted basket of other currencies after a ‘flash crash’ on October 7, where the £1 traded at €1.10 and $1.12 momentarily. Recent legal developments have suggested that a Parliamentary vote may be required to approve the final terms of the UK’s EU exit, helping the Pound to rally back from its lows.

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Across the pond, the Federal Reserve has been debating whether to hike US interest rates, with predictions forecasting a 60% chance that this will be the case before the end of the year. Raising interest rates makes US government debt more attractive (due to higher yields) and, as a result, demand for the US Dollar will increase, negatively impacting GBP.

Meanwhile, the Bank of England continues to ponder its course of monetary policy action. Having cut interest rates in the immediate aftermath of the referendum, inflation has been widely forecast, most notably by the BoE Governor Mark Carney this past month; September Consumer Prices rising at their fastest in two years reflect this. Should inflation continue to rise, the BoE may be forced to raise interest rates, subsequently causing a strengthening of the Pound.

These factors explain why analysts’ forecasts for GBP are increasingly split.

What do the analysts think?

Cable

Since the start of October, Goldman Sachs has maintained that the Pound will eventually fall to $1.20, despite that fact that it is already undervalued according to their existing currency models. HSBC has an identical target of $1.20 by year end, falling even further to $1.10 by the end of 2017, whilst Credit Suisse’s one-year forecast predicts that the Pound will drop to $1.17.

An extreme prediction by Macquarie believes that the Pound could fall all the way to parity with the dollar once the UK enacts ‘Article 50’, allowing it to begin formal negotiations to leave the EU. This, of course, will not take place until March 2017 according to the UK PM.

However, some institutions have a much more bullish forecast for the pound. BNP Paribas this week claim that Sterling is undervalued and Cable could rise to $1.28 by the end of this year and $1.37 by end-2017Lloyds and Barclays also have positive forecasts, predicting $1.25 and $1.24 by end-2016, respectively, and $1.30/$1.36 targets for next year.

GBP/EUR

Forecasts from HSBC, UBS and UniCredit all see the Pound heading back to parity with its European counterpart, predicting this will come about by end-2017.

Credit Suisse also believes that Sterling still has further to fall against the Euro, with the possibility that it could revisit to €1.05. Morgan Stanley also has an unfavourable outlook for the Pound, seeing the currency plumbing lows of 1.08.

However, Lloyds still predicts the currency pairing to rise, despite revising its forecasts down this week to 1.14 by end-2016 and 1.22 by end-2017. Other bullish brokers include BNP Paribas, forecasting the Pound to rally to 1.19 by the end of this year and 1.29 the next, while Barclays sees €1.15 achiveable by this year’s end before rallying to per-Brexit levels at whopping €1.32.

Note that these forecasts, sourced from Bloomberg, are subject to regular revisions as the political, economic and monetary climate in Britain, Europe and the US continue to change.

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Trading FX Pairings

The first, and perhaps most obvious option, is to trade currencies directly. Speculating on where the Pound will go to next against its peers (or perhaps a different currency pairing such as USD/EUR, USD/JPY) warrants you the opportunity to run a profit based on a movement in either direction.

Accendo Markets offers you the option to trade in a multitude of currency pairings with options for both long and short positions.

See GBP strengthening against the Dollar? Open a long position. Do you predict it will fall further? Opt for a short position.

USD October

EUR October

Our in house Research team can provide in depth-analysis of the current movements of FX markets and are here to help you seek out the best possible trading opportunity. Through the use of charting, such as above, and other technical indicators, we can provide you with as much information as you might need!

Cashing in your physical holdings

Thinking of purchasing a house abroad? Perhaps your business relies on an international supply line? Being at the mercy of the movement of foreign exchange markets means that you are more exposed than the average consumer and, as a result, have more to gain from using beneficial foreign exchange services.

In the current climate, approaching a bank or traditional currency exchange facility to change your money could cost you an arm and a leg! Banks trade by adding a handsome margin and offering you an unfair rate.

However, here at Accendo Markets we can offer foreign exchange services with a better rate than the high street. Unlike banks, we don’t offer you a reduced rate by trading using a margin.

Instead, our exchange rate model is based on the volume you trade with us. It could save you thousands!

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Trading FX-sensitive stocks - Markets march on

If trading currencies directly isn’t for you, there are other options available to you to benefit from the future performance of the Pound in the form of stocks that are sensitive to the movements of FX markets.

It is estimated that 75% of UK 100 profits are denominated in foreign currencies; therefore, the UK currency’s current weakness against its peers has resulted in a handsome translational gain for many of its components.

Despite the initial shock to the stock market that Brexit caused, many UK 100 constituents have gone on to post fresh all-time highs alongside the index itself. As a result, UK stock markets have been flourishing; both the UK 100 and 250 have posted fresh all-time highs in the last couple of weeks.

As we have seen since the referendum, some shares have enjoyed more impressive performances than others, many on the back of the weakness of the pound. The top and bottom performers over the period are shown in the table below.

Table

Source: AlphaTerminal, LSE, 21 Oct

Many of the top performing companies have a high proportion of foreign currency-denominated earnings. Should the BNP Paribas analyst prediction mentioned earlier ring true, and Cable recovers to $1.30, what might happen to the top stocks listed above? What about if it went to parity?

Accendo FX Offering

The movement of the Pound, Euro and Dollar will greatly impact your life over the coming weeks and months as political and economic conundrums play out. As a result, choosing one (or more) of the actions mentioned above could, at the least, take a little of the edge off as the Pound hovers near its lows.

Whatever course of action you choose, we’re here to help you make the most of whatever trading opportunities present themselves. Our traders are always on hand to help you, so contact us now!

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The Accendo Markets Research Offering

Does your current broker’s morning report tell you all you need to know about yesterday’s news? If so, how is it offering you anything more than the plethora of information already available on the internet? What about what’s happened overnight?

We’re proud that our morning editorial has become a hot commodity in the City, its content quoted daily by the journalists that are writing the news everyone else will be reading later in the day, if not the next. Our morning report tells you what’s driving the market at that moment and what to look out for in the day ahead.

If a company has reported earnings before the market opens, we’ll tell you why the shares are called to open up or down in relation to that announcement.

We don’t simply tell you which macro-economic data prints are due at what time, we break each driver down so that you fully understand what it all means. What are the expectations in relation to the historic trend? How will this affect the trading day ahead?

The journalists don’t pay for it and neither do you, so why not give it a go? You’ve nothing to lose and perhaps a little more to gain.

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How Accendo Markets can help you

We won’t tell you what to do - it’s your call whether you buy or sell. Our aim is to provide the help you need, if you need it. We’ll highlight opportunities which may be profitable to you, the investor, and assist you in making your own trading decisions. Our approach focuses on these 3 elements:

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Our unique, award-winning service provides you with the help and tools you need to make appropriate trading decisions in the financial markets, both to grow and protect your capital. Just imagine how you’ll feel when you’re confident enough to make you own investment and trading decisions, rather than blindly following those of an expensive advisory broker who really has no better chance of calling the market than you anyway.

Before taking a position in the Index or Stocks, be sure to contact Accendo for…

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The Market Action reports will be sent through daily to an email address of your choice for a two week period. After this time you will simply stop receiving these emails. As a client of Accendo Markets, you will receive our research permanently.

 

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This research is produced by Accendo Markets Limited. Research produced and disseminated by Accendo Markets is classified as non-independent research, and is therefore a marketing communication. This investment research has not been prepared in accordance with legal requirements designed to promote its independence and it is not subject to the prohibition on dealing ahead of the dissemination of investment research. This research does not constitute a personal recommendation or offer to enter into a transaction or an investment, and is produced and distributed for information purposes only.

Accendo Markets considers opinions and information contained within the research to be valid when published, and gives no warranty as to the investments referred to in this material. The income from the investments referred to may go down as well as up, and investors may realise losses on investments. The past performance of a particular investment is not necessarily a guide to its future performance. Prepared by Michael van Dulken, Head of Research

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