It is tough writing on a new topic every week, when persistent volatility leads to déjà vu scenarios as seen over recent months.
The Bank of England is expected to maintain accommodative monetary policy measures following recent data disappointments, the latest of which was seen yesterday with manufacturing production data missing investor expectations for the month of June. This led the sterling to further slide against its peers, notably reaching close to yearly lows vs the dollar.
The trade deficit has even gone to worsen and reach seven month highs as imports for the UK are now more expensive given the weaker currency. There is no long term immediate cause for concern however as it seems a J-curve effect is underway.
In economics, the J-curve effect usually occurs following the depreciation of a domestic currency. In the case of the UK, post-Brexit, immediate short term import commitments by local producers and consumers are now seen to be more expensive as a result of the weaker sterling albeit export demand remaining close to unchanged.
The result is a widening trade deficit in the short term, depicted by the declining part of the curve. Over the medium to long term, as monetary accommodation by the Bank of England (BOE) remains supportive in favour of reboosting the economy, the resulting weaker sterling becomes attractive to foreign investors and producers alike for British assets and products.
UK local producers would also have reduced their medium to long term import quantities in favour of more in house production, perceived as more attractive as a result of the currency depreciation.
It is yet unclear what path the UK economy will take, having yet to trigger Article 50 to formally get their exit negotiations with the EU going, though we could expect a J-curve effect to occur quicker than expected, given the BOE’s decision to lower interest rates last week and further expected to do so going forward, apart from the other taken aggressive accommodative measures.
Although a weaker pound would nonetheless be attractive for international trading partners over the longer term, it is not a question of ‘If’ a J-curve effect will occur but as to how quick the UK will experience the upside benefits of the curve.
The accommodative stance by the BOE is merely a speed factor in the process in the hope manufacturing, production and inflationary data improve in time to avoid recessionary dips in the economy.
We’ll wait and see what opportunities arise. The brunt of Brexit is surely not being felt in the Premier League transfer window, as transfer records continue to get smashed in the millions of pounds. Elsewhere, however, UK Gilts continue to rally to return the all-time lowest yields of 0.561% (as at yesterday).
European peripherals have also benefitted off the Gilt rally, with Portuguese, Irish and Spanish sovereigns yesterday tightening significantly. Coupled with the ECB’s ongoing monetary easing measures the asset class will continue to be monitored as they present potential investment opportunities in harbouring against the persistent volatility.
This article was issued by Mathieu Ganado, Junior Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt .The information, views and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.
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