The headlines screamed of the sharpest one-day collapse for sterling in 30 years, but the Brexiters have so far been right on one thing: The sky didn’t fall in on Friday after English and Welsh voters decided the UK’s political future rests outside the EU.
Friday’s collapse in the value of sterling against the dollar was indeed breathtaking.
It reflected the errors of senior economists and their City of London investment bank employers in believing inaccurate opinion polls.
Their assessment amounted probably to the costliest beaten docket in the history of global political betting.
However, the currency cross rate that matters most to small Irish businesses and the tens of thousands of people they employ is the value of sterling and the euro.
The role played by a weak euro against sterling in bolstering the economic recovery here was downplayed during February’s election campaign.
As the euro slumped against sterling through late last year, Irish business seized the opportunity to sell into Britain with a hugely competitive exchange rate.
The euro had touched a mouth-watering low of 69p last November.
On the eve of the Brexit vote last week, the euro was worth 78p, reflecting a number of factors, including the ill-priced risk of a UK ‘Leave’ vote.
Friday’s sharp 6% fall against the euro was impressive for any currency, especially as sterling is a global reserve currency which is not meant to gyrate against other rich-world currencies including the euro.
However, at 81p, the price competitiveness for Irish exporters into Britain is hardly undermined — for the time being.
It may not even matter for exporters here if sterling weakens further over the coming weeks. It will, however, matter a good deal if political uncertainty in the UK sends sterling to low levels over a lengthy period of time.
The slump in the value of sterling last Friday against the dollar had been predicted. The size of the move nonetheless reflected the poor political forecasting.
What is not known is how the exchange rate will play out over the coming months and whether sterling’s slump against the dollar measures the costs of a poor financial bet or heralds a recession in the UK.
Having got it so wrong over a binary outcome involving an in or out referendum, foreign exchange markets will now be loathe to misprice any political risk involving the EU.
For Irish businesses struggling like everyone else to get a picture of the economic and political risks facing the neighbouring isle, this may paradoxically be a Godsend.
The muted move to 81p on Friday only pushed the euro up to a level of a few weeks ago.
With political uncertainty reigning across Europe, a cap has been put on the gains of the euro against a slumping sterling.
This is hardly foreign territory for Irish exporters who had to contend with a long-delayed economic recovery and an inappropriately high euro exchange rate while the ECB struggled to get a grip on the eurozone’s crisis.
Mario Draghi’s ECB monthly €80bn bond-buying programme has somewhat insulated sovereign bond markets from the Brexit crisis. On Friday, the yieldon the Irish 10-year bond barely flickered, despite Ireland being on the economic front line of any Brexit fallout.
The euro exchange rate against sterling should, of course, reflect in time the impact of the Brexit vote on the UK economy. Absent from most of the post-Brexit commentary has been the hysterical talk of economic meltdown fondly promoted by economists during the referendum campaign.
Irish exporters will be fearing a sharp downturn in the British economy. One more reason the key euro currency exchange rate against sterling will be scrutinised closely by Irish firms for some time.
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