War-gam­ing pound on Brexit vote sug­gests more wild rides

Gulf Times Business - - BUSINESS -

The best case for the pound af­ter next week’s vote on Prime Min­is­ter Theresa May’s Brexit deal is also among the least likely. The worst case, a slump, is only slightly less prob­a­ble.

That’s the find­ing of a Bloomberg sur­vey of 11 banks be­fore Par­lia­ment’s ver­dict on Tues­day on the plan for a March 29 de­par­ture from the Euro­pean Union. De­pend­ing on the vote and May’s re­sponse to it, the cur­rency could jump to the strong­est level since May 2018 or plunge to its low­est point since the Brexit ref­er­en­dum in June 2016.

The pos­si­bil­ity “that there may be no Brexit at all is not out of the equa­tion,” said Ken­neth Broux, a strate­gist at So­ci­ete Gen­erale SA. “A sec­ond ref­er­en­dum would see a knee-jerk boost for the pound.”

The pound bulls’ best case is that the prime min­is­ter pur­sues a sec­ond ref­er­en­dum af­ter los­ing the vote on Tues­day, ac­cord­ing to the sur­vey. Re­spon­dents from the 11 banks as­sign just a 15% chance to May’s deal pass­ing the first time. They see a 25% prob­a­bil­ity that the gov­ern­ment will call a sec­ond plebiscite on ex­it­ing the EU: That would be the most sup­port­ive out­come for ster­ling, trig­ger­ing a rally to $1.35 from about $1.28 now.

With the dead­lock in Par­lia­ment rais­ing the pos­si­bil­ity that a Brexit deal won’t be ap­proved by the March dead­line, the idea that Bri­tain could pur­sue an ex­ten­sion is gain­ing trac­tion among traders, de­spite gov­ern­ment de­nials. The mar­ket is now more pes­simistic on ster­ling’s prospects in nine months than in three months.

A sec­ond ref­er­en­dum “could be­come the only way out of the mire if there was still an im­passe in the UK par­lia­ment at the eleventh hour,” said Kathrin Goret­zki, a cur­rency strate­gist at Uni­Credit SpA. “This would likely pro­vide some ini­tial re­lief to mar­kets that the near-term cliff-edge risks will ei­ther be avoided or de­layed.”

A sec­ond ref­er­en­dum might be the most pop­u­lar sce­nario with in­vestors, but it’s po­ten­tially the most com­pli­cated out­come to achieve. There’s no ma­jor­ity in par­lia­ment for an­other vote; the op­po­si­tion Labour party favours a gen­eral elec­tion over a re­run of the 2016 bal­lot.

If there was a gen­eral elec­tion, the pound could drop al­most 5% to $1.22, ac­cord­ing to the re­spon­dents. Ster­ling would suf­fer be­cause of in­vestor con­cern that a gov­ern­ment led by Labour’s Jeremy Cor­byn would boost taxes and spend­ing, No­mura In­ter­na­tional Plc says.

The sur­vey also sug­gests that the mar­ket is not priced for a no-deal Brexit, even though Bri­tain has not much more than two months to strike a deal. Re­spon­dents put the odds of no deal at 15%, the low­est prob­a­bil­ity of all the sce­nar­ios - but they see the pound plung­ing to $1.15 if that does hap­pen.

The poll il­lus­trates the chal­lenges fac­ing in­vestors, with strate­gists as­sign­ing dou­ble-digit prob­a­bil­i­ties to at least five dif­fer­ent out­comes. BNP Paribas switched on Thurs­day to rec­om­mend­ing a long po­si­tion in the UK cur­rency, though it also said there’s a risk of as much as a 6% drop.

Faced with such un­cer­tain­ties, sev­eral clients are opt­ing to avoid the UK al­to­gether, ac­cord­ing to Rabobank’s head of Group of 10 cur­rency strat­egy, Jane Fo­ley. Big food com­pa­nies are look­ing east as an al­ter­na­tive to in­vest­ing in Bri­tain, she said.

“That won’t change un­til there is some clar­ity about the po­si­tion,” she said. “Over­all, there is a lot of con­cern about the po­ten­tial pound volatil­ity and the re­la­tion­ship with the EU over the next year or two.”

Not ev­ery­one is so cau­tious. The pound has al­ready weak­ened more than 13% since the Brexit ref­er­en­dum, and short po­si­tion­ing re­mains stretched. Hedge fund man­ager and Brexit backer Crispin Odey said this week he thinks Bri­tain will even­tu­ally stay in the Euro­pean Union and is po­si­tioned for pound gains as a re­sult.

Bri­tain’s Prime Min­is­ter Theresa May leaves 10 Down­ing Street via the back exit in Lon­don (file). The pound bulls’ best case is that the prime min­is­ter pur­sues a sec­ond ref­er­en­dum af­ter los­ing the vote on Tues­day, ac­cord­ing to a Bloomberg sur­vey.

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