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BREXIT: What about currencies?


As far a currencies, payments, people and companies are concerned, each may be affected in the same and different ways simultaneously. The UK's withdrawal from 'Europe', the single market and the close alliance with our continental neighbours may very well change our entire outlook on trading and payments, not because the public voted for that, but as an inevitable reaction to the change in our relationship with Europe. Most blogs written since June 2016 have concluded that we just do not know what is in store because negotiations have yet to be concluded. One thing we at Prime Cap can be sure of though is that there will be change and change, in an economy as committed to growth as the UK is, will mean improvement in our view.

Essentially, for those sending payments to foreign currency denominated accounts, it is business as usual; your UK bank will still use the same payment networks and currencies will still be readily available. The rate will be changing, of course, but twas ever thus and, you may well find that the dust settling on the UK's exit terms brings much longed for stability and some predictability to the forex markets.

Regardless of whether or not you're a business paying a supplier or an individual topping up their euro or dollar account, the mechanisms by which you do this and the time it takes to arrive etc. will remain the same in the near term. Or rather, there has been no suggestion that these activities will change in any way and to conclude they simply must change because other things will is to express an overly pessimistic view.

Overlay onto this the fact that relations with a huge swathe of those operating in the global market place will be changing and you have to recognise the fact that it is not just the method of dealing as we do now which 'could' change, but the reasons why and the costs of so doing may go up or, in fact, down. One school of thought is that withdrawal from European directives on financial regulation could breathe new life into certain segments of the UK economy, not least the technology we all rely on to send and receive money.

A change in trade arrangements with the United States may well cause USD to increase in value. Losing GBP exports...or rather, having current export markets augmented by the introduction of other players, may undermine the value of the euro. Also, any lack of new trade agreements is only going to bring pain to whichever government is in power after the transition period. No deal will prompt concern over economic growth, and a bad deal would tie the UK to a longer term millstone. All of these and none of them could play out.

At the moment the US is one of the hardest markets, in terms of payments and international movement of capital, for non-bank entities to operate in. Such are the financial and tax regulations that an individual resident in the United States is not permitted to use a foreign exchange broker based in somewhere like the UK, even though that person may have holding in the UK or be doing something like buying a property. They may not use such an entity unless that money service business is registered and licensed in the state in which the prospective client is resident. This makes it prohibitive for boutique firms to deal with US residents because we can hardly justify the expense and the work needed to register in all the American states. So, does Brexit and increased financial proximity to the US mean that new markets will open up? Potentially very much so.

As The Chancellor (Philip Hammond as of 21/08/17) said, all be it rather faintly, the economy underpins any conversation you care to have about Britain's post EU future. Inflation is a key and immediate concern and, given stagnation in wage increases, could very well see an increase in interest rates. This raises the issue of consumer debt and the ability of families to service borrowings they secured whilst interest rates were at an all time low.

Are national savings low because consumers are confident in better times and calmer waters, or because the cost of living has gone up, so, to maintain living standards, families are living more hand to mouth?

Interest rates and their associated effects are one of the key drivers of currency strength. Even speculation well in advance of any change in policy or rates can have a significant effect on a rate of exchange.

Ironically though, should interest rates go up in the UK and although the pound may rally fractionally, beneath that increase in rates there sits the decomposing remains or a buoyant economy (dark). Without an increase in wages to match, consumers will be caught out. The playing out of this across the markets, when coupled with no clear trade agreements, may very well see a flight from the pound which would see GBP drop and inflation increase further as import costs go up.

Confidence and optimism, real as well as imagined, is what the markets needs. Whatever your feelings on what voting to leave the EU says about the people who did, in the immediate present, living standards, employment and debt/spending would and will all benefit from optimism from the consumer and clarity from those in government.

Dealing with a broad range of individual FX requirements and a variety of businesses puts Prime Cap in a strong position in terms of feed back and chatter as to the concerns of a cross-section of British life who may or may not be affected by changes coming down the road.

Anecdotally, one of the most interesting perspectives is the view that one's personal relationship with Europe and the freedoms one enjoys when it comes to travel and tourism will undoubtedly be affected by our leaving the European bloc. Why is it that someone's immediate conclusion is that things will change. We appreciate that things must change, but those luxuries that the main-street enjoys are unlikely to be altered in such a way as to completely remove them from being. By that we mean that just because we're leaving the EU doesn't mean, necessarily, you'll find it any harder to holiday in the South of France or your roaming fees will go back up. Both sides want things to stay as close to how they were as possible in terms of day to day life; those who voted to stay in the EU should take some confidence from that...those who voted leave didn't vote for a total about turn on our way of life as we currently know it (he says).

Agriculture, namely farming, stands to be affected following our excision from the Common Agricultural Policy. Single farm payments: those lump sums paid to farmers, which subsidise them to such an extent as to enable them to compete with their continental neighbours, may well tail off by some measure.

One wonders whether that mightn't be a good thing. Was Woolworths bailed out or subsidised so as to remain on the British high-street? No. Such was and is the nature of survival on the high street that the retailer could not survive. Focussing on competition within a domestic market should drive both innovation and a correction in production and costs. Sad that an industry may be forever changed, but, this is what the majority of Brits who voted voted for.

In the housing market, many renters were motivated to vote leave by some arguably flawed belief that the price of buying a house would drop. This view fundamentally fails to understand what drives the market and, at the same time, expresses the labyrinthine nature of the 'consumer debt increase while rates are low' paradigm.

Foreign buyers of the type often criticised in the press and on main street are not those economic migrants arriving in the UK and, despite oft highly qualified, doing low paid

unskilled jobs. They are the growing middles classes of countries who do not enjoy the freedom and security that Britain takes for granted (yes, we are aware this seems a touch 'ranty', but it is fair to say that we expect our streets to be policed and our military to be loyal to the government of the day). The UK is considered stable by the vast majority of nations. It is that stability and the fact that the state won't tax certain holdings or simply appropriate them which is what overseas investors and the buyers of a number of properties prize and indeed purchase for. These folks are not going to suddenly disappear because the Jolly Roger is no longer flying in Brussels; and, for the most part, it wouldn't surprise Prime Cap if there were an increase in the 'open door' rhetoric that The Mayor of London is keep to peddle. Rich foreigners, investors or not, are an important part of local economies especially in London where residential property is the corner stone of many high-streets and local networks.

Having said all this, there are just about enough owners of property, and would-be owners of property, in the UK who are waiting to see what conditions and terms are agreed between the UK and the EU to have caused a wobble in confidence. Commentators then layer on the an uncompromising dose of innuendo and speculation which seeps down on to main-street and into the first-time-buyers' fear that now would not be a sensible time to borrow more than they could ever earn. They rent. They don't save. They stress eat and drink, which, because of price wars in supermarkets - supermarkets terrified of posting sub-par figures - means they ingest ever higher levels of nutritionally bankrupt E numbers. This is why recessions and depressions tend to be considered both inevitable and self fulfilling; the best way to buck the trend and exceed expectation, in this instance, is for the government to offer something truly meaningful and powerful around which we can all agree and about which the UK in general can get excited. Fingers crossed that happens soon.

Aside from the disappointing anti-social overtones the referendum's outcome seems to illuminate, the effect on our clients is essentially that the price of what they wish to buy - by that we mean their 'buying power' as is - will go down in the near term. Prime Cap remains confident though that other suitors will come to market (once we have extracted ourselves from the single one) to fill the slots and, although their wears may be different, normality should resume in about 5 years. All of this reshuffle should actually present an opportunity within the payments space for innovation and a greater understanding of how the practical tools you might use to export successfully already exist and can make a profound difference to your bottom line.

Yes, headlines are shouting about 'eight year low' over here and 'three month decline' over there, but, this is totally to be expected and we suspect that in some dank corner of the Bank of England an economist is sitting there weeping for joy; weeping because they had feared it would be so much worse. Most folks are failing to appreciate just how significant a shift Brexit means. We should have a free falling currency. We will have a contracting economy. These are the things that we knew would happen. Maybe more could have been done to prepare us for these effects, but had more been done then the point finger of 'project fear' would have been thrust into the faces of everyone who has even the slimmest grasp of basic market economics. It is not the end of the world. We will get through this, and with change will come improvement.

If you would like one of our team to add some spice to this and many other outspoken interpretations of contemporary existentialism then do call us on 02031728193.

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Prime Cap Payments Limited (T/A Prime Cap | Prime Cap Payments | Prime Cap Global Payments) is registered in England and Wales No: 10755730. Registered address: 27 Old Gloucester Street, London, WC1N 3AXPrime Cap is partnered with, and a programme manager of, Ebury Partners UK Limited who provide Prime Cap's FX and payment services.  Ebury Partners UK Limited is authorised and regulated by the Financial Conduct Authority as an Electronic Money Institution (Financial Services Register No. 900797) and is registered in England and Wales (registered no. 7088713). Registered office: 3rd floor, 100 Victoria Street, Cardinal Place, London, SW1E 5JL.  Ebury Partners UK Ltd is registered with the ICO with registration numnber ZA345828.