Happy end­ing to Brexit saga may still elude pound even with deal

Gulf Times Business - - BUSINESS -

The pound’s rally this month on grow­ing op­ti­mism for a Brexit agree­ment may be ig­nor­ing a big risk: get­ting any deal through Par­lia­ment.

While an­a­lysts ex­pect the cur­rency to gain fur­ther if Bri­tish law­mak­ers sign off on any di­vorce set­tle­ment, they fore­see the script go­ing awry if par­lia­ment doesn’t ap­prove the deal. Prime Min­is­ter Theresa May could be sent back to the ne­go­ti­at­ing ta­ble with the Euro­pean Union, be forced to hold a sec­ond ref­er­en­dum or even call a gen­eral elec­tion.

Any of those sce­nar­ios could spark a de­cline in the pound, mak­ing it at­trac­tive for BlueBay As­set Man­age­ment LLP, one of Europe’s big­gest money man­agers, to be sell­ing the cur­rency.

“Risk-re­ward favours short pound,” said Mark Dowd­ing, a money man­ager at BlueBay, which man­ages $60bn. “We don’t see any deal hav­ing an easy pas- sage through the Com­mons. Ul­ti­mately there is a good chance of a gen­eral elec­tion in the next six months, ei­ther be­fore or af­ter Brexit.”

Ster­ling has gained about 3% this month to above $1.31 and more than 1% to 87.24 pence per euro on a flurry of pos­i­tive head­lines about progress. May is said to be pre­par­ing to ask the Cabi­net to ap­prove a draft Brexit deal po­ten­tially within days, if she can over­come new re­sis­tance to her strat­egy from eu­roscep­tic Tories.

A ma­jor­ity of MPs in the 650-mem- ber par­lia­ment have to vote in favour of a Brexit deal in or­der for it to pass through the Com­mons. This could be a chal­lenge both be­cause May doesn’t hold a ma­jor­ity and be­cause ei­ther proBrexit or pro-Re­main law­mak­ers could rebel. The op­po­si­tion Labour party said on Tues­day that it would not vote for a Brexit deal keeping the UK in a cus­toms union only tem­po­rar­ily.

If the deal is voted down, it makes the UK more likely to crash out of the EU with­out any agree­ment in March, said Rabobank’s head of cur­rency strat­egy Jane Fo­ley.

“We would ex­pect the mar­ket con­sen­sus to shift to­wards a hard Brexit and for the pound to fall sharply with euro-ster­ling push­ing up to­wards 0.95,” said Fo­ley. “If a hard Brexit hap­pened we could see euro-ster­ling ris­ing to­wards par­ity.”

For now, some strate­gists ad­vise sell­ing the pound into ral­lies or buy­ing volatil­ity as the out­come of Brexit is still too dif­fi­cult to pre­dict. If Par­lia­ment re­jects the deal that could lead to ei­ther a sec­ond vote – which may be ster­ling pos­i­tive – or a no-deal Brexit, which would hurt the cur­rency, ac­cord­ing to Jeremy Stretch, head of Group-of-10 cur­rency strat­egy at Cana­dian Im­pe­rial Bank of Com­merce.

A re­jec­tion lead­ing to an­other elec­tion and then a vic­tory for Labour is the worst-case sce­nario for some in­vestors, even though it might lead to a softer Brexit. Neu­berger Ber­man Group money man­ager Steve Eis­man is short­ing two Bri­tish banks on ex­pec­ta­tions Par­lia­ment re­jects the deal and could short 50 UK stocks if he thinks Labour will win.

In­vestors in the op­tions mar­ket ex­pect the pound’s volatil­ity to pick up, with the one-month gauge now at the high­est since Fe­bru­ary. Even at the most ex­pen­sive in eight months, a bet on volatil­ity could see gains, ac­cord­ing to Stretch.

“I still as­sume the deal will be agreed, but I sus­pect the vote will be a real knife-edge af­fair,” said Stretch. “At this point it’s worth re­mem­ber­ing the mantra ‘noth­ing is agreed un­til ev­ery­thing is agreed’.”

Pound has gained about 3% this month to above $1.31 and more than 1% to 87.24 pence per euro on a flurry of pos­i­tive head­lines about progress

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