Market Insights: Brexit Fears Unduly Pound Sterling | BetaShares

Market Insights: Brexit Fears Unduly Pound Sterling

BY David Bassanese | 15 March 2016
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The decision by United Kingdom Prime Minister David Cameron to hold a national referendum on European Union Membership has created a scare through British financial markets, with sterling taking a “pounding” in particular.  But with polls suggesting a “Brexit” remains unlikely, this might be an opportune time to consider buying the beaten down British Pound, particularly against the overvalued Australian dollar.

Brexit Fears Rock Markets

On Saturday 20 February, UK Prime Minister David Cameron announced there would be a national referendum on continuing British membership of the European Union to be held on 23 June 2016. The announcement came a day after Britain secured re-negotiated terms for EU membership aimed at tightening restriction on migrants, and limiting possible further encroachment of EU regulations on the UK economy and financial markets.

The general consensus among the economic “elite” is that leaving the EU – or “Brexit” – would be harmful to the UK economy, as it could compromise business access to EU markets and harm the role of London as a global financial centre.

Indeed, as seen in the chart below, on the Monday following the weekend referendum announcement, the British Pound sank by 0.8% against the Euro, 1.8% against the US dollar, and by 2.6% against the Australian dollar.  Around half of those losses have since been recovered against the Euro and US Dollar, but (along with other currencies in general), the British Pound has weakened further against a resurgent Australian dollar.

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Will Brexit take place?

At first glance, the polling with regard to a possible Brexit suggests the result could be quite close.  According to the Financial Times “poll of polls”, for example, around 45% of those surveyed want to stay in the EU, which is only slightly ahead of the 40% that want to leave. Ominously, almost one in five British people are still undecided.

                                          Financial Times “Poll of Polls”
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Against this, however, are a couple of arguments suggesting the “ayes” may have it.

For starters, national polling consists of a mix of both online and telephone polling, and the history of recent general elections (voting for which, like the June referendum, is not compulsory) suggest the latter tends to provide a more accurate read on how people eventually vote at the ballot box.  In this regard, it’s worth noting that telephone based polls consistently show a much higher proportion of British are in the “Yes” camp.

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But as with many uncertain events, perhaps the best read comes from the betting markets.  In this regard, it’s worth noting that current betting has the odds of a Brexit at only around 30% (or 12/5 odds as a bookie might say).

A Stay Vote Could Boost the Pound

To the extent there is a risk of a “Brexit” still priced into the British Pound, there is scope for a relief rally should the phone polls and betting markets prove themselves right and the UK votes to stay in the EU.  As seen in the chart below, the Pound has dropped particularly sharply in recent months against the Australian dollar.  From a technical perspective (using the relative strength index or “RSI” in the chart below), the Pound also appears oversold against the $A at least on a short-term basis.

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Brexit fears aside, fundamentals also favour the British Pound eventually strengthening against the $A. Indeed, the Pound bottomed out against the $A with the peak in commodity prices in 2011, and has been generally strengthening against the $A since early 2013.  The pull back in the Pound since mid-2015 appears only corrective in a larger uptrend, which could take the Pound back to 2.80-2.90 levels against the $A seen before the commodity price boom.

The BetaShares British Pound ETF

It has never been easier for Australian investors to gain exposure to the British Pound thanks to the BetaShares British Pound ETF (ASX Code: POU), which can be bought and sold on the Australian Securities Exchange (ASX) just as easily as a company share.

By primarily investing in bank deposit accounts denominated in British Pounds, POU aims to track the change in price of the British Pound relative to the Australian dollar.  If the British Pound goes up 10% against the A$ (i.e. the A$ falls in value), for example, POU is designed to go up 10% too, before fees and expenses. Obviously if the reverse occurs and the Pound was to fall in value relative to the Australian dollar, the value of POU will fall too.

 

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