Pound falls ahead of May’s grilling before parliament on Brexit blueprint

PUBLISHED : Monday, 16 January, 2017, 12:44pm
UPDATED : Monday, 16 January, 2017, 6:26pm

The British pound slumped on Monday as investors worried that British Prime Minister Theresa May would announce a hard Brexit on Tuesday.

Sterling weakened by nearly 200 basis points on Monday morning against the US dollar and was traded at US$1.2075 at 4.50pm, down 0.83 per cent or 101 basis points. At one point it hit US$1.1986.

May is scheduled to outline her Brexit approach in a speech on January 17, one day before she faces prime minister’s questions in the House of Commons.

British press reports said May is expected to make a clear case to pull the UK out of the European Union in order to regain control of immigration, which is the so-called “hard Brexit”.

“Bears have now set their sights on the sterling revisiting its US$1.1450 low seen during the flash crash on October 7,” DBS Bank analysts said in a note Monday morning.

If risk aversion sets in then investors would sell the pound for Japanese yen, they said.

The Japanese yen, which is seen as a safe-haven currency, extended its strengthening streak for a sixth straight trading day, at 114.10 per US dollar on Monday afternoon, up 0.36 per cent.

The Chinese yuan, meanwhile, was only slightly changed. Onshore yuan in Shanghai closed at 6.8976 against the US dollar at 4.30pm, only 24 basis points stronger. It hovered at around 6.8975 per dollar during early trading in the evening session.

The offshore yuan in Hong Kong weakened 0.22 per cent or 148 points to 6.8604 against the greenback at 4.45pm.

The People’s Bank of China set the yuan reference rate at 6.8874 on Monday against the US dollar, up 35 basis points to the strongest level since January 9.

The US dollar index, which weakened to 101.18 on Friday, has been losing momentum since it hit 102.94 on January 11, since Donald Trump’s first press conference mentioned little about fiscal stimulus or tax policy.

Yuan investors are facing a funding squeeze, escalation of capital controls and mixed economic data, said Stephen Innes, senior trader at Oanda.

“Last week’s trade data tempered the market outlook on China. I think global uncertainty will continue to weigh on China trade and the potential for a trade war between US and China is a possibility, which points to further risk for China on the trade front,” he said.

China reported a 7.7 per cent year-on-year drop in exports and a 5.5 per cent decrease in imports for the full year 2016. The export drop was the worst since 2009.

“China still wants an orderly depreciation of the yuan to offset mounting trade uncertainty, and while I think the yuan depreciation will likely continue post-Lunar New Year, fears of more funding squeeze continue to plague the market and there’s simply less appetite for the short yuan trade at this juncture,” Innes said.

The central bank said on Monday that the outstanding funds for foreign exchange held by the country’s financial institutions fell 317.8 billion yuan to 21.94 trillion yuan in December. That represents a drop for 14 months in a row, indicating continuous capital outflow amid concern about the yuan’s depreciation.