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The Chances of a Hard Brexit (and Plunging Pound) are About 25%

The extraordinary uncertainty over the outcome of Brexit makes a fundamentals-based valuation of the GBP/USD exchange rate exceptionally challenging. What follows is an effort to describe the odds of three different Brexit outcomes - a hard-Brexit, an orderly Brexit, and a second referendum - from the GBP/USD exchange rate. The resulting estimates suggest about a 25% chance of a hard Brexit that would likely cause a 10-15% depreciation of the pound.

The Impact of a Hard Brexit will Surely be Severe

The International Monetary Fund has, by far, the most careful and rigorous forecasts of Brexit’s impact on the UK economy. It has projected that a hard Brexit, where the UK leaves the EU without an agreement on trade and capital flows, would reduce the long-term level of UK GDP by about 6.5%. As shown on the right (taken from the IMF’s blog), the IMF’s estimate is around the midpoint of other estimates on the effect of a hard Brexit. 

Tempering Commodities Optimism

Recent Optimism about Commodities Goes Too Far. We have noticed a growing optimism about the near-term path of many commodities prices. A recent example is Goldman Sachs, which cites an overvalued dollar, a more dovish Fed, Chinese stimulus, and tightening oil supplies as favoring commodities in 2019. We are not unsympathetic to their view, and we have recently written that oil and precious metals, in particular, enjoy short-term upside. We also agree that the dollar is overvalued (Figure 1 shows the BIS estimate of the real broad dollar exchange rate which controls for inflation) which, if it corrects, will boost many commodities prices. We also think that slowing global growth is likely to benefit the short-term prospects for many precious metals.

Promether Short Report

Promether aims to become an all-in-one solution for private and secure networking. It plans to create a new type of network known as the Adaptive Symbiotic Network (ASN) that will protect the privacy of all participants in the network. The Company intends to act as an application building block by giving developers access to a “next-generation, security-based open-source Application Building Block - API” without the need to be experts in networking and security

Precious Metals: Silver Has the Best Outlook

Commodities, including precious metals, do not have a stable price that they eventually return to in the long-term. There may, however, be stable long-term connections between different commodities, which help provide insight on whether any are mispriced.

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