Many Irish importers have been actively buying sterling in recent days as they bet that sterling's renewed weakness against the euro, ahead of a key Brexit speech today from British prime minister Theresa May, may be short-lived, according to traders.
Sterling fell to a fresh two-month low of 88.5p against the single currency yesterday and a 31-year-low of $1.19 against the dollar, excluding the effect of a “flash crash” in sterling rates in October.
It came after reports that Ms May will signal that the UK will fully break out of the EU single market after Brexit.
However, sterling moved off its lows to end European trading down 0.7 per cent against the euro, at 87.9p, as some analysts speculated the collapse of Northern Ireland’s power-sharing government and planned snap election on March 2nd would delay the Brexit timetable.
"The negative sterling chatter has been the talk of the foreign-exchange markets for the last week and the sharp drop in the pound has seen a lot of sterling buyers/Irish importers take advantage of this surprisingly sharp move," said Justin Doyle, a senior treasury dealer with Investec in Dublin.
Nervousness
Mounting market nervousness about a series of elections in Europe in 2017 against a rising tide of anti-establishment sentiment internationally – starting in March in the Netherlands and followed by France, Germany and possibly Italy – should cap the euro’s strength against sterling in the coming months, according to Mr Doyle.
However, US investment bank JP Morgan said yesterday it now saw the euro rising to 88p in the first quarter and 93p by the end of the year, with both forecasts 2p above its previous projection.
Deutsche Bank now sees a deterioration in political rhetoric around Brexit acting as a catalyst to ultimately push sterling towards parity against the euro and $1.06 against the dollar.
Any renewed threat by the euro to move above the psychologically important 90p level, breached for a period during October and early November for the first time since 2011, was bound to “raise eyebrows and heart rates” among Irish exporters, Mr Doyle said.
Update
Davy economist
Conall Mac Coille
warned in an economic update published yesterday, in which he cut his 2017 Irish economic forecast to 3.7 per cent from 4 per cent, that the potential of trade tariffs being introduced after Brexit would compound the woes of exporters.
Meanwhile, Garret Grogan, head of trading at Bank of Ireland Global Markets, said his team was dealing with an increase in currency-sensitive businesses looking to hedge their foreign-exchange requirements, "as a hard Brexit becomes more likely".
“Sterling moves have been the dominant story for Irish exporters since the start of last year,” said Mr Grogan. “We saw a significant uplift in pound hedging in the run-up to and post the UK referendum on EU membership. The US presidential election also triggered significant currency hedging.”
European equity markets declined yesterday, with the Iseq falling 1.2 per cent in Dublin, with Kingspan and Bank of Ireland, both of whom have large UK exposures, among the worst performers.
The FTSE 100 declined by 0.2 per cent, ending a winning streak spanning 14 sessions in which the London benchmark index closed at record highs as export-oriented UK companies benefited from sterling weakness. The pan-European Stoxx 600 index dropped 0.8 per cent.
