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Aussie exporters react to Brexit FX uncertainty

Aussie exporters react to Brexit FX uncertainty

(14 December 2018 - Australia) Australian importers and exporters are reportedly turning to FX risk management products in response to ongoing Brexit uncertainly.

United Kingdom Prime Minister Theresa May successfully carried an internal conservative leadership vote last week yet support is flagging and her main imperative was to step down at the next election. GBP/USD appreciated by one percent intraday, reaching as high as US$1.267 as the result was released before weakening to US$1.261 after the vote share was made public.

The UK currency has decreased significantly since the initial Brexit referendum in June 2016 from US$1.50 against the US dollar, impacted by swings in sentiment as the scheduled exit from the European Union (EU) approaches in March 2019. The range of potential outcomes for sterling around the mooted departure from the EU is wide, with the prospect that Britain will reach the March 29 deadline without a deal in place at one end while a fresh referendum resulting in the country electing to stay within the EU is at the other. Another possible outcome is a general election where leadership is handed over to the opposition Labour Party led by Jeremy Corbyn.

East & Partners Business FX research, based on direct interviews with 2,600 internationally trading enterprises, indicates FX Options and Forward FX usage is rising slowly in conjunction with higher hedge ratios yet many small businesses remain heavily exposed to unpredictable currency market movements, directly impacting their bottom line.

Implied three-month volatility for the Pound Sterling against the US dollar has increased to a level of 14, almost double the level from Q3 according to CBA Senior FX Strategist Joseph Capurso. "The market doesn't know what is going to happen and thinks that there is a chance of a large move in sterling. It's very unusual to get over a level of 10” he stated. The increase is an expression of the market's view of increasing uncertainty over Britain's path out of the EU. Westpac Senior Currency Strategist Sean Callow declared that he is receiving a higher number of queries than usual about price action in the Aussie Dollar against Pound Sterling. "People are wondering what they can do and what's next. They are puzzled by the various scenarios. The risks around both a sharply positive and sharply negative outcome for sterling from the Brexit negotiations appear to have increased compared to even a few weeks ago. The probabilities of the most bullish and bearish scenarios have increased. All we can really say is that every scenario we have right now implies a weaker pound than if the UK had voted to stay in the European Union. There's a lot of discussion of options pricing with corporate managers and fund managers trying to make decisions about whether they will turn to options in the current market.”

The outcome from Britain's unpredictable EU exit path that NAB views as the one most likely to eventuate involves the country achieving a relatively "soft" exit from the EU that allows the UK to continue to trade easily with its continental trade partners. "Markets have a deep fear of a left-wing profligate government, which Labour is happy to portray itself as" said NAB Head of Currency Strategy Ray Attrill. “The range of outcomes is still huge. That risk of events moving sharply and generating a binary outcome in currency markets lends itself to the use of options. We tell Australian companies with businesses in the UK that if you have risk you should cover that risk. The use of options is increasing in these kind of markets". He warned that option market participants will pay a premium on any options they hold. "On the other hand it can be extremely rewarding."

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