The autumn in the United Kingdom is typically a time for the main political parties to host their party conferences, traditionally in seaside resorts once favoured by the Victorians.
This year, the Labour party is holding its conference in Brighton, a seaside town on the Sussex coast. There is much scrutiny on this year’s gathering of left wing politicians, because of the party’s success in the June election.
While not in government yet, it has succeeded in taking away the government’s absolute majority, and many commentators see it as simply a matter of time before a Labour Government takes the reigns of power.
Labour has proved unusually savvy, it seems, in holding workshops on the edges of the conference to discuss and plan for a potential sell-off in the pound, should it come to power. These exercises, chaired by the shadow chancellor, John McDonnell, are intended to rehearse the possible immediate consequences for the GBP in the aftermath of a Labour election victory.
These concerns have their basis in the market reaction to the referendum on EU membership in 2016, and how both that vote and subsequent speeches by prime minister Theresa May have severely undermined the strength of the currency.
Traders are now becoming used to seeing their brokers raising margin rates in the run up to major political decisions, because reactions in the forex market have been severe in recent years.
Sterling in partciular has proved especially vulnerable – the USD benefits from the fact that it is the currency of the world’s largest economy and the de fact global reserve currency. The EUR represents a large bloc of 12 countries, among them Germany and France. This insulates it from political problems in just one member state.
Not so the pound: although the UK is a G7 member, it does not have the economic clout of a China or Japan, and since the Brexit decision, the economy is perceived to be struggling.
Labour speeches at the party conference have painted a lurid picture of an establishment conspiracy to undermine a future Labour government by damaging the currency.
However, the big issue is whether there will be sudden capital flight, with many investors seeking to remove assets and wealth from sterling and the UK.
Investors will fear higher taxes and an anti-business environment. Labour is being sensible, too. By having a plan in place, it demonstrates a level of foresightedness that the current government has been lacking.
“What if there is a run on the pound,” McDonnell asked. “What happens if there is a concept of capital flight? I don’t think there will be, but you never know, so we’ve got to scenario plan for that. People want to know that we are ready and they want to know we have got a response to everything that could happen. Because if we can demonstrate that, that will calm things down.”
Investors in UK assets, who have been fairly sanguine since the Brexit vote, and who have enjoyed buying into sterling-denominated shares since the pound has declined, will want to know they will not be punished for holding UK investments.
The party has, however, admitted that a financial transaction tax was on the cards in a planned July budget had it won the election in June.
This is a tax levied on any financial transactions in the public markets, also sometimes called a Robin Hood tax, partly designed to raise revenues from short term speculation in financial markets.
Early attempts in other countries to introduce such a tax have mainly served to drive dealing activity offshore or back into OTC markets.
For FX traders, a short sterling trade seems an obvious position to take in the event of a potential Labour election victory, and there is likely to be a wall of money lined up against the GBP when the UK next goes to the polls.
Selling in the aftermath of a Labour Government victory is likely to be sustained, and unlike with the Brexit vote, investors from abroad may be loath of snap up discounted sterling assets, out of fear of draconian tax legislation.Advertisement