How Brexit Affects The Currency Exchange Market

The Pound Sterling the current currency in England took a beating and plummeted to historical lows while the stock market hit record highs. Britons and the rest of the world are wondering if the country will enter a recession.

In a historic vote last June 2016, the United Kingdom voted to leave the European Union. The event dubbed “Brexit” had an immediate – and massive – impact on the foreign exchange and equities market.

However, the bigger concern is the long-term effect of Brexit on the Pound Sterling. Will Brexit affect the purchasing power of Britons? How will Brexit influence the movement of the currency market?

brexit headline on newspaper

The Pound Sterling In The Aftermath Of Brexit

Since June 23, 2016 – the date the referendum results were declared “official – the Pound Sterling has been trending downward. Once the news was digested by the currency market, the Pound Sterling plummeted. Any upward movements of the Pound Sterling were just corrective and the currency continued its downward trajectory.

british sterling 20 pound notes

In comparison to its value before the referendum, the Pound Sterling is 15% lower. The biggest losses were versus the United States Dollar and the Australian Dollar. Sellers of the Pound were at a disadvantage. For speculators, the present rates of exchange presented good buying opportunities for the Pound Sterling.

Other Factors That Contributed To The Fall Of The Pound Sterling

When chief Brexit-proponent Boris Johnson announced he would run for the Prime Minister position, the market did not favourably react and dumped the Pound Sterling.

Johnson made the announcement after then-Prime Minister David Cameron resigned from the post.

Likewise, weak economic indicators pushed the Pound Sterling to new currency market lows. In particular, the Purchasing Manager Index which measures activity in the 3 key sectors – services, manufacturing, and construction – registered a huge drop.

There were also rampant fears from Britons that the government did not have a reliable post-Brexit strategy. The international community got involved warning the United Kingdom of repercussions if there was no Brexit transition plan in place.

Of the major cities, London was most affected by Brexit with several large multinational corporations announcing their plans to relocate business to its European neighbours.

All of these factors contributed to making the Pound Sterling the worst- performing currency of 2016.

How low did the Pound Sterling go? Venezuela which was experiencing hyperinflation had its Bolivar ranked higher than the Pound Sterling.

The Pound Sterling was also vulnerable to technological innovations in currency trading.

Traders use algorithms which initiate automatic trades whenever specific conditions are met. Currency market analysts that were tracking the movement of the Pound Sterling on October 20, 2016, believe that the algorithms initiated a sell-off for the currency after the President of France, Francois Hollande questioned the progress of negotiations for Brexit.

On that night – during the Asian market trading session – the Pound Sterling again plummeted to new lows. The Pound had sharply fallen by 2.1% versus the Australian Dollar, 2.2% against the United States Dollar, and 2.3% vis-à-vis the Canadian Dollar.

By the time the European session started trading, the Pound slid even lower. The collapse of the Pound Sterling was perceived as the biggest threat to the economic stability of the United Kingdom since the Financial Crisis of 2008.

Are Traders Behind The Fall Of The Pound?

treading app on phone

Based on the observed trend in the fall of the Pound Sterling, the currency reacts adversely then slightly gains ground. For a period of time, the Pound will consolidate or trade narrowly within the new low then the cycle will repeat itself.

Fortunately, some positive news about the economy of the United Kingdom has been keeping the Pound Sterling afloat.

Many traders share the belief that the Pound has remained bearish because participants are maintaining short positions in the currency market. Predominantly short positions on a currency means traders are expecting it to weaken and fall further. Thus, they “borrow” the currency for the purpose of selling it down.

If the bearish predictions come true, the traders will simply buy-back the Pound Sterling at a lower price. After returning the cost of the borrowed funds to the creditor, the trader pockets the difference as profit.

The movement of a currency in the foreign exchange market is a reflection of the sentiments of its participants. At any time, the players in the foreign exchange market are the investors, speculators, and fund manager who have their respective opinions on the value of a specific currency.

With the general consensus leaning toward uncertainty about the government’s plan for a post-Brexit Britain, the sentiment of the market for the Pound Sterling has not been optimistic to say the least.

The truth is, the decision of the United Kingdom to leave the European has only succeeded in shrouding the country under more uncertainty. And with so many questions lingering about the status of the United Kingdom once Brexit has become official, the Pound Sterling will continue to take hits in the foreign exchange market.

Former PM Theresa May’s announcement that the process for undertaking the U.K’s official departure from the EU would be initiated by end-March 2017, failed to buoy the Pound Sterling. It seemed that the sentiment had turned and more Britons were staring to favour a return to the EU.

While some portions of Britain’s exit plan have appeared to be clarified such as its intention to control immigration, the currency market remains unconvinced and has not given the Pound Sterling enough support to get it out of the current lows.

Are There Ways For The Pound Sterling To Recover?

For now, it is unclear if there is a way out for the Pound Sterling to climb out of the bottom of the foreign exchange market. However, there are a few factors that could contribute to a potential recovery in the future.

First, if the Bank of England decides to maintain the current rates of interest or inject more funds into the U.K’s economy, the market may perceive those actions as expressions of confidence and give the Pound Sterling more buying support.

Another bullish development would be if the E.U gives the U.K a favourable trade agreement. Politicians on the side of the E.U who expressed willingness to consider single-market access in lieu of freedom of movement may stimulate confidence in the Pound Sterling.

For the Pound to recover, the politicians involved in making Brexit work should consider the economic repercussions. In time, the U.K’s economic data would strongly have an effect on the movement of the Pound.

For example, if the U.K’s politicians were somehow able to convince companies to stay in Britain, the decision would most certainly prop up the Pound Sterling.

If you are planning to transfer or exchange money in the future, it would be a good idea to stay informed on the latest news on the currency markets.

Will Walmart Coin Challenge Bitcoin And Libra?

Walmart, the world’s biggest company in terms of revenues, has decided to diversify its portfolio further by throwing its hat into the cryptocurrency market. According to the news agency, Bloomberg, the giant retailer filed a patent for Walmart coin last 29 January. Already working within the currency transfer services with their Walmart to Walmart tracking services, this sees the retail giant move into the cryptocurrency markets, read on to find out more…

Walmart Coin’s entry into the cryptocurrency had a bullish effect on the share prices of Ethereum ( ETH-USD) and Bitcoin (BTC-USD) which gained 5.4% and 9.9% respectively.

In contrast, Walmart’s stock fell slightly by 0.57%.

Social media platform and media agency, Facebook, had earlier announced that the company was launching its cryptocurrency called Libra.

Upon close review of the companies’ respective patent filings, it seems that Walmart Coin and Facebook’s Libra share a few characteristics.

First, both Walmart Coin and Libra are categorized as a Stable Coin. Second, both cryptocurrencies are targeting the same market: low-income households that do own bank accounts or hardly transact with traditional banks.

person trading cryptocurrency

The difference between the 2 cryptocurrencies is in how their values are determined.

Whereas Walmart Coin follows the standard practice of pegging the cryptocurrency to fiat money, Libra will be supported by low-volatility but high-quality assets that will be denominated in global currencies considered to be stable.

Walmart Coin May Have An Easier Time With Regulators And Lawmakers

Facebook’s well-documented problems in ensuring data and consumer protection have created problems between Libra on one side and cryptocurrency regulators and lawmakers on another.

walmart legal rep looking at walmart coin

Even United States President Donald J. Trump has jumped into the issue and has criticized the social media giant’s venture into cryptocurrency. U.S Federal Reserve Chairman Jerome Powell is likewise concerned about Facebook’s latest move.

Critics of Libra are questioning why it would be based in Switzerland and why the cryptocurrency has to be backed by global currencies instead of the U.S. Dollar.

On the other hand, Walmart Coin may not experience the same level of scrutiny as Facebook’s Libra for a few reasons.

First, as mentioned, the Walmart Coin’s value will be pegged to the U.S. Dollar which will mollify any reservations from the Fed. Second, Walmart’s decision to venture into the cryptocurrency market will not be seen as an attempt to establish a monopoly, unlike Facebook.

Already regulators and lawmakers are alarmed by the eventual entry on e-commerce giants Amazon and Alibaba into the cryptocurrency market.

It was reported that Amazon had also filed a patent for its cryptocurrency. Meanwhile, Alibaba which is affiliated with ANT Financial recently introduced its mining platform.

Not The First Financial Rodeo For Walmart

walmart shopping trolley in car park

For 9 years, Walmart had tried to venture into financial services. However, the Independent Community Bankers Of America or ICBA denied Walmart’s efforts which traversed the years 1998 to 2007.

The ICBA informed U.S lawmakers that the organization will closely look into Facebook’s proposed cryptocurrency, Libra. If this is any indication, it is highly possible that the ICBA might give Walmart Coin a few problems in entering the cryptocurrency market.

Walmart Coin Could Claim The Cryptocurrency Market Over Bitcoin Or Libra

Facebook may have over 2 Billion subscribers. However, Walmart has a larger base of buyers and sellers.

Walmart has a massive retail footprint encompassing 11,500 stores and affiliated retailers in 27 other countries. As a retailer, Walmart thrives on aggressive buying behaviour which could help drive demand for the Walmart Coin.

Facebook, which could be out of its natural element, may have to feel its way around the financial market and grind it out more than Walmart. To push Libra, Facebook would have to be creative in its approach.

Despite the patent filing, Walmart has not officially announced that it will get into the cryptocurrency market. Observers note that Walmart could be staying on the sidelines to see how investors receive Libra.

Another big name in IT, Apple, clarified that the Apple Card does not have facilities to allow users to buy cryptocurrencies. The announcement, coupled with the fact Goldman Sachs is backing the Apple Card, has analysts speculating that Apple will soon introduce a cryptocurrency product.

Will Bitcoin Take The Place Of Fiat Currency?

Venezuela’s economy is a case study of financial mismanagement by the government. The country is besieged by rampant starvation, hyperinflation, and massive immigration. The downfall of Venezuela’s economy has its roots during the administration of Hugo Chavez and has worsened in Nicholas Maduro’s presidency.

It should be noted that governments worldwide, including the United States, have been borrowing at levels perceived to be unsustainable. If these debts cannot be managed, they will collapse and lead to the downfall of several countries’ economies.

Because Fiat money is an instruction or demand from the government to recognize the money as a medium of payment, its value can be affected by the performance of the country’s economy.

bitcoin coin

The Argument For Bitcoin Over Fiat Money

Advocates of the theory that bitcoin will one day replace fiat currency as the primary monetary system point to the situation in Venezuela as proof that governments cannot be trusted with managing the country’s economy.

The fiat currency doomsayers will present as Exhibit A the trend of Venezuelans selling the government’s fiat money, the Bolivar, for bitcoins.

What they fail to recognize is that despite Venezuela experiencing hyperinflation, the Bolivar remains a usable currency. Proof of the Bolivar’s viability is that you can still exchange it to another currency. Thus, there is still demand for Bolivars in the foreign exchange market.

Bitcoin advocates also failed to consider the implications and repercussions of a country’s economic collapse on society and politics.

History has recorded the fall of some of the world’s most powerful economies. The collapse in a country’s economy is almost certainly followed by a period of social and civic unrest.

100 dollar bills

Again, going back to the crisis in Venezuela, the country’s crime rate is rising. For the reason that hyperinflation has made it impossible for Venezuelans to buy coffee more so basic commodities, incidents of theft, looting, robbery, and murder have been on the rise.

Likewise, the worsening crisis has led to greater political instability. The downfall of Venezuela has emboldened the Opposition party led by Juan Guiado to initiate a power grab from Maduro.

The Risks Of Favouring Bitcoin Over Fiat Money

One of the consequences of the political struggle between Maduro and Guiado is the loss of basic utilities such as power and water.

How can you access bitcoin if there is no power to use a computer?

When a country’s citizens are looting basic commodities, hoarding water, and arming themselves with guns as a means of protection, what will be the purpose of bitcoin when it has zero tangible value?

At a time when social and civic unrest increases the need for survival, people will tend to hold on to commodities that still have tangible value. With bitcoin, you will not be able to pay for basic necessities.

You cannot even exchange bitcoin for foreign currency at the local bank. This is because the bank will be left with only local currency that has very little value.

If you have been keeping track of news about bitcoin in the last few years, you will see just how volatile the cryptocurrency market is. It will reach unprecedented record highs and hit rock-bottom lows without much indication or warning.

bitcoin wallet on samsung phone

Ironically, the performance of bitcoin can be symbolised by the traditional coin. For every person who made a killing in the bitcoin market, on its flip side are people who got killed by investing in the bitcoin market.

Conclusion

Bitcoin is extremely volatile and unpredictable!

You might see the value of your newly-purchased bitcoin drop in only a few minutes if it is matched by a significant volume of declines.

This risk; this vicious cycle of steep climbs and sharp drops will continue to happen with bitcoin because there aren’t many bitcoins to accommodate the high level of demand for them.

In a market where high demand is met with low supply, you can be assured of extreme volatility and greater risk of chaos.

Lastly, bitcoin advocates can’t seem to get around the fact that the value of their favorite cryptocurrency is pegged to the fiat currency being circulated by the government.

Therefore, if the fiat currency falls in value and essentially becomes worthless, what would be the value of bitcoin?

If your country erupts in chaos and civil unrest, would you use bitcoins to pay for food, water, and a gun to keep your family safe? Good luck with that!

The argument that bitcoin will one day replace fiat currency does not, and will never hold water.

Alibaba Buys WorldFirst For US$700Million

Online retail giant Alibaba has thrown its hat into the money transfer business with its purchase of London-based payments and remittance servicing company WorldFirst for a reported $700M. The purchase was done through Ant Financial, the financial services arm of Alibaba.

In a statement to its customers, WorldFirst officially confirmed the purchase by Ant Financial and validated reports circulating last December that both companies were in negotiations for a possible acquisition for an estimated $717 Million or GBP550 Million.

The acquisition more than just signified Alibaba’s foray into the money transfer business. It also highlighted the growing relationship between the European and Chinese markets.

In addition, the purchase of WorldFirst which has been in business for more than 15 years has put the small-scale payment services companies under the microscope. Amazon has started its own remittance service business and there is a burgeoning industry of money transfer proprietors in Asia.

WorldFirst gained prominence as a company that provided customers – private individuals and businesses – a platform to exchange currencies and remit payment at prices that were much lower than those offered by traditional retail banks.

According to WorldFirst, since it started operations in 2004, the company has handled over $90 Billion worth of transfers. The company also claims that it has averaged in excess of one million transfers every year.

The online remittance and money transfer market is hugely patronized by overseas workers who have to make regular payments to their families.

Ant Financial runs the Alipay service, a mobile app that allows its more than 550 million users to make payments. Alipay is the number one payment service app in China.

Alibaba owns a third of Ant Financial which has been estimated to be valued at $150 Billion. The company has been trying to expand its service coverage to Europe and other parts of the world.

WorldFirst co-founder and CEO, Jonathan Quin, believes that the acquisition of his company by Ant Financial represents a synergy of their respective goals and capabilities. After all, many UK merchants already recognize Alipay.

Quin confirmed that WorldFirst will continue to maintain its brand and will eventually become a wholly-owned subsidiary under Ant Financial.

For Ant Financial, the tie-up with WorldFirst will provide greater value to Alipay’s current line of services.

Sources report that the acquisition became of great importance to WorldFirst which had been funded for years by private investors. WorldFirst’s annual GMV is estimated to be $10 Billion.

Amazon’s introduction of its own payment service, Amazon Currency Converter for Sellers, sent shockwaves across the online money transfer industry. With the service, customers of Amazon no longer have to use other money transfer services like those of WorldFirst.

Amazon also introduced Amazon PayCode. This is a tie-up with Western Union that allows people where Amazon is not operating at to pay for its merchandise using local currencies.

Amazon PayCode has seen action in Kenya and Thailand. The service appears to have affected the performance of Alipay and other money transfer service providers.

Then, there is the matter of growing competition from other small-scale money transfer companies such as AirWallex and PingPong. The combination of these factors has contributed to the slowdown in WorldFirst’s growth.

The decision to acquire WorldFirst is seen to boost the international presence of Ant Financial by giving it a foothold in the lucrative European market. It also comes at a time when Ant Financial has made costly mistakes trying to expand its services around the globe.

One such stumble was its failure to buy MoneyGram in 2017 for a reported $1.2 Billion. The deal met resistance from the United States government and Ant Financial had to forego its acquisition of MoneyGram which is listed in the Nasdaq.

For its part, WorldFirst made its own moves to expand outside the confines of the United Kingdom with its proposed acquisition of US-based startup Wyre.

Wyre which is headquartered in San Francisco specializes in blockchain technology intended to shift the company’s focus toward currency exchange API service to B2B customers.

A few months after its purchase of Wyre, WorldFirst announced that it would shut down the service. Sources believed that the decision was a response to Ant Financial’s failure to secure MoneyGram.

Ant Financial has been aggressive in its expansion within Southeast Asia. The company has invested an estimated $200 Million into a Korean company, Kakao Pay. Ant Financial hopes its moves can repeat the same success as Alipay in China.

Recently, Alipay announced that it plans to introduce its services to U.S Walgreens outlets. Point-of-Sale company First Data included Alipay as a payment option to Stateside. Likewise, Alipay has made similar ventures and partnerships in Asia and Europe.

EC President Calls Out Italy’s Government For Slacking On Economy

During a joint press conference with Italian Prime Minister Giuseppe Conte, European Commission (EC) President Jean- Claude Juncker called out Italy’s League 5 Star government for not doing more to save the Italy’s failing economy.

Rising Debt In Italy

In particular, Juncker called the government’s attention to Italy’s rising level of public debt. To address the dire situation, Juncker stressed the need for the government to focus on programs that can trigger growth in the economy and the strength of italy’s currency

For his part, Conte asked Italy’s neighbours in the European Union (EU) to help jumpstart the European economy by increasing public spending.

Instead of taking accountability for the government’s failure to sustain economic growth, Conte alluded to the trade war between the United States and China as the most significant contributor to the country’s economic woes.

Healthier Fiscal Position Encouraged

Thus, he urged the EU to ask countries with healthier fiscal positions to invest in programs that would encourage economic growth in Europe.

Conte appeared to take the opposite position and defended the government by stating that it had anticipated a slowdown in economic activity and had to resort to the implementation of “expansive fiscal policies”.

According to Conte, he believes the Italian government is on the right track and will not change or amend its current policies.

Criticisms From OECD

Juncker’s comments further added fuel to the incendiary criticisms made by the Organisation for Economic Cooperation and Development (OECD) on one of the Italian government’s major fiscal policies, its reform of the citizen’s income and pension program.

To further add to the Italian government’s woes, the influential Paris group of developed economies reduced its projected growth target for Italy to 0.2 percent. In its agreement with Brussels, Italy targeted 1 percent economic growth this year.

France Poised To Overtake Italy As The World’s Fourth Most Indebted Nation

According to Bloomberg, their projections on total public debt in 2018 showed that it is possible for France to overtake Italy as the world’s fourth most indebted nation in 2019.

Continue reading “France Poised To Overtake Italy As The World’s Fourth Most Indebted Nation”

Yanis Varoufakis: Brexit Will Trigger EU’s “Great Decline”

Yanis Varoufakis, the former Finance Minister of Greece, believes Brexit is a by-product of the “disintegration of the European Union” and that Britain’s official exit on 29 March will trigger the “great decline” of the EU.

During an interview with Channel 4 News, Varoufakis shared his opinion that the decision of Britain to leave was proof the Eurocrats of the EU failed to prioritise the interests of its own citizens.

european flag

The former Greek Finance Minister pointed out to the European Commission’s approach to Brexit during the negotiation process. For Varoufakis, the EC seemed to prefer to use tactics that were cagey and shrewd such as extending talks past the exit date which he referred to as a “fake deadline”.

Significant economic consequences

Varoufakis stressed that Britain leaving the EU will have significant economic consequences for the EU because of Britain’s strong economic ties with its member-nations.

The EU has a Euro 145 Billion trade surplus with Britain.

He recommended that the EU focus on having productive negotiations with British PM Theresa May.

Varoufakis thinks both the EU and Britain can negotiate a win-win position simply by realigning their interests and changing their respective mindsets:

• The EU should send a message to the rest of the European continent that a member –nation has the right to oppose and still walk away with a deal that is mutually beneficial for all parties.

• PM Theresa May should put the interest of the British above everything else instead of worrying about her Tory Party staying united.

Threat to EU

The Greek Finance Minister was not the first one to recognize the threat Brexit could pose to the EU. Another one was Nigel Farage who referred to Brexit as a brick that was “knocked out” of the EU wall.

Farage is widely acknowledged as the architect of Brexit.

With the imminent departure of Britain, experts on the EU and its policies believe changes within the bloc are necessary in order to keep the group stable.

In particular, the EU will have to contend with the threat of Italy’s populist government that is led by Matteo Salvini and Luigi di Malo.

Salvini and di Malo moving away from EU

Under Salvini and di Malo, Italy has considered cutting off contributions to the EU in order to gain more control in its policy-making machinery. The key issues as far as Italy are concerned, are the pressing problems of the deficit and rising immigration.

greek flag flying

So far the movement of Salvini and di Malo to move Italy away from the clutches of the EU appear to be gaining momentum.

For Ian Kearns, who is an expert on European Affairs, if Italy leaves the EU, it may motivate other member-nations to follow suit. Under the EU’s single-currency system, countries leaving the EU would discourage other countries from lending to them. In the event of a bailout, the single-currency system of the EU will no longer suffice.