Tim Focas, the director of financial services at Colloquium discusses the Boris Brexit debate
Investors are understandably weighing the pros and cons of Britain’s place inside the EU, and many fear that London would not hold the same influence outside the EU. But London accounts for well over 40 percent of global FX turnover and is unlikely to lose its position as a currency power outside a centralized political union.
As the Sterling plummets following Boris Johnson’s decision to support a Brexit, investors are understandably weighing the pros and cons of Britain’s place inside the EU. The good news for British Prime Minister David Cameron is that the “in” campaign appears to be gathering momentum – thanks in no small part to cash injections from the likes of Goldman Sachs.
With London firmly placed as an FX leader, investors could be forgiven for thinking that this institutional capital is reason alone to go with the in-crowd. After all, London’s FX traders currently buy and sell more than twice as many euros than the entire euro zone and more dollars than the US. Why would investors want to put London’s position in euro trading under threat by going against the elite? It’s a strong argument, but there is a view to the contrary.
As investors and FX market participants know, London accounts for well over 40 percent of global FX turnover. However, one of the city’s closest European rivals, Switzerland, accounts for around 3 percent of global FX turnover. The fact that this is small in comparison isn’t the point; the Swiss franc is used as a reserve currency around the world – currently positioned just behind the US dollar, Yen, Sterling and, of course, the euro. As we witnessed around the Swiss bank’s shock currency unpegging, the strength of the Swiss franc has a huge impact on other currencies. The point here is that if Switzerland can remain a currency power outside a centralized political union, why can’t the City?
But it’s not just about the value of Sterling – there are logistical and operational factors to consider here. Unlike Switzerland, London offers the deepest pool of capital in the time zone between Asia and the US, and GMT is often quoted in international business settings. This logistical benefit is unique to the City and would not change regardless of the result.
Then there is the infrastructure factor. London’s trading infrastructure means that any move of currency flow to mainland Europe would come at a huge cost and would not be quick. These links connect electronic trading, which now accounts for more than half of the $5.3 trillion-a-day FX market. Moving these links from London would require infrastructure spending beyond the capacity of most other European countries.
Over the coming months, lobbyists will no doubt continue to push Cameron’s narrative that London would not hold the same influence outside the EU. As tempting as it may be for undecided investors to go with the flow, they should consider this: These were the same voices that said London would collapse as a global financial center if Britain didn’t join the euro. A five-year euro zone debt crisis and the near bankruptcy of Greece later is surely reason enough for investors to think again. Regardless of the referendum outcome, it is hard not envisage a future without the City at the operational heart of global FX trading.
Tim Focas is the director of financial services at Colloquium