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Pound Falls as Investors Weigh Worst-Case Brexit as Vote Fails

ForexJan 15, 2019 09:10PM ET
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© Bloomberg. A collection of one pound sterling coins sit in this arranged photograph in London, U.K., on Wednesday, Aug. 15, 2018. The pound's weakness is turning everyone—from students to holiday-makers—into unwitting currency traders as Brexit nears. Photographer: Chris Ratcliffe/Bloomberg

(Bloomberg) -- The pound declined in Asia trading as investors start to weigh a worst-case Brexit after Prime Minister Theresa May’s bill was roundly defeated by lawmakers.

Sterling slipped 0.3 percent to $1.2829, while also dropping against every Group-of-10 peer, with traders saying flows were thin as most investors stayed on the sideline. While May is expected to survive a vote of no confidence called by the opposition party later Wednesday, uncertainty over how she will pull together a new deal has spurred risk aversion.

“Tuesday night’s vote may have increased the chances of a second referendum but it also increased the chances of a no deal Brexit –- both tails are now a bit fatter and GBP volatility has risen accordingly,” said Sue Trinh, head of Asia FX strategy at Royal Bank of Canada in Hong Kong.

The pound has lost around 13 percent against the dollar since the day before the U.K. voted to leave the European Union in June 2016 amid fears that the departure would hurt the country’s economy. Bank of England governor Mark Carney has said that a no-deal outcome could lead to a quicker pace of rate hikes to control inflation.

The opposition Labour party has said that all options, including campaigning for a second referendum, remain on the table if there isn’t a general election. That would be the best case for sterling, boosting the currency to $1.35, according to a survey of analysts. The worst case -- leaving with no deal -- would see the pound drop to $1.15.

“The question now, assuming Labour fail, is whether they now default to a second referendum as party policy,” said Adam Cole, chief currency strategist at RBC Europe Ltd. “That should be clear within a couple of days.”

Here’s a selection of analyst views:

Columbia Threadneedle (Not seen the worst)

  • The market hasn’t yet seen the worst for the embattled currency, as GBP/USD is still in line with the past month’s average level around $1.28, says Ed Al-Hussainy
  • “On a volatility adjusted basis, being short USD vs GBP is still unattractive from my perspective, even though the payoff can appear asymmetric in favor of GBP”
  • Investors are still heavily short and they will “cover aggressively in every instance where we are able to reduce the odds of a hard Brexit”

National Australia Bank (Low to mid $1.30s)

  • “I don’t see GBP rallying much until markets are sure the Conservatives have seen off the confidence motion,” says Gavin Friend, senior markets strategist
  • “Assuming it is, we continue to see GBP gradually climbing as Parliament moves on”
  • “We have GBP moving into the low-to-mid $1.30s in the coming weeks”

Credit Agricole (PA:CAGR) (Labour win unlikely)

  • Pound traders are still in buy-the-rumor, sell-the-fact mode, according to Credit Agricole head of G-10 currency strategy Valentin Marinov
    • Corbyn is unlikely to succeed in ousting the government given that both the Tory party and the DUP are expected to support the government, he says

Eurizon SLJ Capital (Pound undervalued)

  • The pound is “so weak and so cheap -- it is so undervalued,” says Stephen Jen, chief executive, who says fair value is between $1.50-$1.55
  • “I don’t know if it goes lower because it’s like stretched a rubber band”
  • “Worst-case scenario is Corbyn becoming prime minister
  • “The policies won’t be helpful for the U.K. That may weigh on sterling”
  • “This outcome is so dire for Brexit that the chances of a softer Brexit or even a second referendum may have risen”

Amplifying Global FX Capital (Pound positive)

  • “This is positive for the pound,” says founder Greg Gibbs
  • “The chances of a no-deal Brexit are so slim now it’s not even really worth considering anymore”
  • “It looks increasingly that the resolution will be an even softer version than May’s proposal and/or a new referendum””

Pound Falls as Investors Weigh Worst-Case Brexit as Vote Fails
 

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Devine Pips
Devine Pips Jan 16, 2019 2:11AM ET
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This means pound will go above 1.3 - LOL
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Devine Pips
Devine Pips Jan 16, 2019 2:11AM ET
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Sooner than later :)
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