The View | Brexit woes mean it’s now the pound, not China’s yuan, fuelling market turbulence

A leading economy that has slowed sharply and is at daggers drawn over its trade relationship with its most important partner. A major currency that is one of the worst performing against the US dollar since April and is a focal point of anxiety in financial markets. And a crisis that, if it were to intensify significantly in the coming months, could become a source of systemic risk for the global economy.

Up until last week, this dire predicament was most closely associated with China. But, following the dramatic political developments in the UK over the past several days, it is now more synonymous with the mounting risks posed by Britain’s impending divorce from the European Union.

While many currency investors have been fretting about the yuan breaching the psychologically important threshold of 7 versus the dollar, it is the pound which is far and away the most vulnerable major currency right now. It is also a proxy for investors’ fears of the chaos that would ensue from a no-deal Brexit, mainly in the UK but also across the European continent, where growth is already slowing markedly.

Last Thursday, sterling at one point suffered its sharpest one-day fall against the US dollar in two years, dropping nearly 2 per cent as a flurry of ministerial resignations from Prime Minister Theresa May’s government increased the risk of Parliament rejecting a draft withdrawal agreement reached with Brussels.

According to data from Bloomberg, the one-month implied volatility of the pound-dollar exchange rate, known as “cable” in foreign-exchange markets, surged to its highest level since the aftermath of Britain’s EU referendum in June 2016. Currency strategists now describe sterling, which is down 10.5 per cent against the dollar since mid-April, as “untradeable”, such is the level of political uncertainty in the UK, Europe’s second-largest economy and the main global hub for foreign-exchange and derivatives trading.