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Good morning,

After a brief period of relative stability the pound is once again in the firing line and is trading at multi-year lows this morning. Last night’s Asian session saw the 1.30 as well as the 1.29 and 1.28 levels in GBPUSD with GBPEUR now down around 1.1670.

Easy money in, hard money out

A lot of yesterday’s moves came on the news that a number of UK property funds are throwing up obstacles to investor redemptions in a bid to assuage a fire sale. This industry has a classical liquidity mismatch in that money comes in monthly and can only be crystallised following a lumpy or infrequent valuation. The Global Financial Crisis saw this effect increase contagion as investors wanted havens that were liquid and you can’t blend a brick.

While these moves are not as a direct result of the Brexit vote, they have happened in the aftermath of the vote and that leads consumer and business confidence by the nose to further negative outcomes.

Downturn coming but waiting for the wave to break

Comparisons with 2008 and the Global Financial Crisis and the UK economy post-Brexit are unhelpful; there are very few people out there who believe with any credibility that any downturn seen from the vote result would be in any way as damaging as the credit crisis. That is not to say that significant credit and funding problems may not present themselves but, as was made clear by Governor Mark Carney yesterday, the Bank of England is ready to act and could do so as soon as next week.

The outlook for businesses, both small and large, is difficult to qualify at the moment and the data from the UK economy is yet to show the initial effects of Brexit. We will have to wait until August for that insight to reach us.

Why would you buy pounds?

In the meantime, sterling is expected to continue falling; there is no positive news politically to act as a stop gap and the data picture very much remains an unknown. In an atmosphere of global risk, we have to ask why an investor would want to take on the issues that the pound has. That is not to say that a rebound is unlikely but a meaningful rally may have to wait until next year.

Elsewhere

As much as the pound has been weakening, the yen has been strengthening and USDJPY is getting closer and closer to 100.00 and these deflationary moves in major exporting markets are a negative for global growth. We haven’t even spoken about the slide in the Chinese yuan yet and that is a classic devaluation although in a period of huge outflows from China; an uneasy balance for the world’s 2nd largest economy.

The focus today away from the clown car that is the once proud pound will be the Federal Reserve’s latest minutes. The meeting statement did not mention Brexit but global concerns are once again front and centre of the Fed’s thinking.

On the US economy the picture has remained solid with the statement noting that ‘the pace of improvement in the labor market has slowed while growth in economic activity appears to have picked up. Although the unemployment rate has declined, job gains have diminished. Growth in household sentiment has strengthened.’

The dovishness of the meeting has been expressed by a dampening of rate expectations through 2017 and 2018. I think the Fed is finally cogniscent that it overegged expectations at the beginning of the year for a full four rate increases, and in a post-Brexit landscape we now see none.

Have a great day.

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