Brexit fallout: British pound down again

  • 07/07/2016
Brexit fallout: British pound down again

The pound has tumbled to a fresh 31-year low, at one point dipping below US$US1.28, on fears Brexit will hit Britain's property market and the prospect of cuts in Bank of England interest rates.

The pound, one of the main vehicles through which financial markets can express concern about Britain's decision to leave the European Union, fell as low as US$1.2798 in Asian trading, its lowest since June 1985.

It recovered to about US$1.2891 in afternoon trading in London.

That still left it more than 13 per cent weaker than it was before the June 23 referendum, and about 1 percent lower on the day.

Worries have grown in the past two days about financial stress.

The Bank of England warned on Tuesday of threats to financial stability, pointing out the effects on property markets.

Trading has now been suspended in six of Britain's biggest property funds as investor redemptions rose.

Among the property funds to announce a suspension in customer withdrawals was M&G, the fund management arm of insurer Prudential, which made the announcement after the London market close on Tuesday.

The Bank of England also expressed concern on Tuesday about a fall in investor demand for British assets, which could make it harder to finance the current account deficit, putting more pressure on the pound.

Money markets now price in a good chance of a cut in one or more of the BoE's official interest rates to zero within the next three months, possibly as early as next week.

A Reuters poll of more than 60 foreign exchange strategists forecast the pound at US$1.27 by year-end from Monday's close of around US$1.30, but the latest decline has left some traders talking about a weakening past US$1.20.

Yields on British 10-, 20- and 30-year government bonds sank to record lows, extending their slide since the day after the shock referendum result.

The yield on 10-year gilts fell as low as 0.724 percent, almost half its level on June 23, when Britons were voting in the referendum which many investors had expected to keep Britain in the EU.

Meanwhile, three more UK property funds have suspended trading, preventing investors from getting their money back and joining a trend that has prompted a rise in calls from savers to the financial services complaints body.

The funds pulled down the shutters after a wave of investors asked for their money back amid speculation about a drop in UK commercial property prices.

Henderson Global Investors, part of Henderson Group, said on Wednesday it had temporarily suspended trading in its £3.9 billion UK Property PAIF and PAIF feeder funds due to "exceptional liquidity pressures" given uncertainty after the "Brexit" vote and the other suspensions.

It was followed within the hour by Columbia Threadneedle, part of the Ameriprise Group, which said it had suspended trading in its Threadneedle UK Property Fund.

Canada Life said in a note to investors seen by Reuters that it had also suspended its Canlife Property and Canlife UK property funds.

They join rival funds managed by M&G Investments, Aviva Investors and Standard Life Investments which stopped trading on Monday and Tuesday.

In response to the rash of suspensions, Britain's Financial Ombudsman Service said it had begun to receive calls from concerned retail investors worried about the closures and the potential hit to their savings.

"It is certainly too early for formal complaints about this issue, however, we have begun to see initial enquiries come through from concerned consumers," a spokeswoman said.

"This is something that is very much on our radar. Although the decision to suspend redemptions was expected, the extent of the suspensions by the three funds so far is quite troubling."

Property funds can find it particularly difficult to cope with a rush of redemptions as it can take time to sell their assets in order to give investors their money back.

Reuters

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