Sterling slides to 31-year low as Brexit shock deepens

GBP/USD down 3.5%, investors price in BoE rate cut

London (Reuters): Sterling fell to a 31-year low against the dollar on Monday as a sell-off stemming from Britain’s decision to quit the European Union gathered pace, with the euro also pressured as Brexit clouded the future of the rest of the bloc.

Safe-haven currencies like the yen and the Swiss franc extended gains, much to the discomfort of the Japanese and Swiss central banks.

Sterling fell past $1.32 to $1.3192, its lowest since mid-1985, taking losses to 11.8% since last Thursday’s vote. The currency failed to get much of a lift from British finance minister George Osborne’s assurances to markets that the economy was in good shape and that the government and Bank of England had further actions available to them if needed.

The pound saw its worst day in modern history on Friday, as investors betting on Britain remaining in the EU were reversed en masse. On Monday, a slide in banking shares along with a lack of clarity on who runs the British government, a likely fresh move for Scottish secession and the response of the EU and its ability to contain calls by anti-EU parties across the continent all combined to make matters worse for sterling.

Given all the uncertainty, investors are pricing in a rate cut this year with some analysts expecting the Bank of England to consider quantitative easing to cushion the economy. Gilt yields hit record lows, with the 10-year benchmark dropping below 1%.

“While we deem sterling as undervalued at these levels, the mixture of political uncertainty, flagging growth and concerns about the current account deficit should keep a lid on sterling during the weeks and months ahead and prevent any meaningful or long lasting recovery,” said Petr Krpata, currency strategist at ING.

Many economists have cut growth forecast for the UK. Goldman saw Britain entering a mild recession within a year due to a deterioration in its terms of trade, scaled-back investment and tighter financial conditions because of exchange rate fluctuations, and weakness in risk assets.

The safe-haven yen and the Swiss franc rose. The Swiss National Bank had intervened on Friday while investors are likely to test the Bank of Japan’s resolve in coming weeks.

The greenback was 0.6% weaker at 101.56 yen after shedding 1.8% last week. The dollar hit 99 yen on Friday, its lowest since November 2013.

“The yen is a safe haven as long as risk sentiment is weak, but the market is also very wary of official intervention and with good cause,” said John Hardy, head of currency strategy at Saxo Bank.

Japanese Prime Minister Shinzo Abe said on Monday he has instructed Finance Minister Taro Aso to watch currency markets “ever more closely” and take steps if necessary, four days after Britain’s historic vote.

The euro was down 0.8% at $1.1016, having hit a three-month low of $1.0912. It was 1.4% lower against the yen and nearly 0.5% lower against the Swiss franc.

Gold gains as investors seek refuge after Brexit vote

Reuters: Gold rose on Monday, sticking close to a more than two-year peak reached in the previous session, as uncertainty over Britain’s vote to leave the European Union forced investors to sell equities and seek safer assets.

Bullion surged 4.8% on Friday, its biggest single-day gain since January 2009, as the British vote forced a selloff in risky assets from industrial commodities to stocks and sterling.

Gold is often perceived as a hedge against economic and financial risk.

Spot gold rose as much as 1.5% to a session high of $1,335.30 an ounce and was up 0.8% at $1,325.46 by 0959 GMT. It rallied 8% to $1,358.20, the highest since March 2014, at one stage on Friday.  

Gold denominated in sterling rose to its highest since April 2013 on Friday, as the currency fell to its lowest in 31 years. 

“The uncertainty around the timing of negotiations to leave the EU means that not only do investors become more defensive and buy things like gold and the dollar, but it also keeps sterling under pressure and translates into a permanent loss of economic activity at domestic level,” ETF Securities analyst Martin Arnold said.

The British referendum verdict probably means the Fed’s ambitions for two rate rises this year have been placed on hold, analysts and experts said. 

Goldman Sachs has raised its gold price forecasts saying Brexit suggested a more sustainable impact on the trajectory of U.S. interest rates.

Gold is sensitive to interest rates changes, with increases mostly signalling a rise in the opportunity cost of holding the non-interest yielding metal.

“Gold price will go higher in the third quarter as the full ramifications of Brexit begin to be felt but expect it to fall back in fourth quarter after the U.S. election and as the Fed gets ready to hike again,” Macquarie said.