UK Prime Minister Theresa May knows she’s about to cause more pain for the struggling pound and trigger God only knows what kind of reaction in the FTSE and Gilts, but she doesn’t care.
Or more pointedly: it’s going to be a “hard” Brexit and she doesn’t give a shit who knows it.
As I noted on Saturday evening when the news first crossed the wires, May looks prepared to incur the market’s ire as she prepares the country for a complete break with the EU:
U.K. SET TO LEAVE SINGLE MARKET, CUSTOMS UNION: SUNDAY TIMES
— Walter White (@heisenbergrpt) January 14, 2017
Downing Street expects a “market correction” and decline in pound * May will seek transitional deal, newspaper says
— Walter White (@heisenbergrpt) January 14, 2017
To be clear, we’ve already seen a “decline in the pound,” and a rather dramatic one at that:
Here’s Bloomberg with more on May’s forthcoming speech:
U.K. Prime Minister Theresa May will this week signal plans for a “hard Brexit’’ by saying she’s willing to quit the European Union’s single market for goods and services to regain control of Britain’s borders and laws, the Sunday Times reported.
In a speech scheduled for Tuesday in London, May will prepare to withdraw from tariff-free trade with the region in return for the ability to curb immigration, strike commercial deals with other countries, and escape the jurisdiction of the European Court of Justice, the Sunday Times said without saying how it obtained the information.
May’s blueprint for Brexit risks alarming investors, bankers and company executives who will fret that May is prioritizing social issues over economic growth. Government officials told the Times they expect her speech to cause a “market correction.” The pound fell last week to its lowest level against the dollar since October on concern about her intentions.
May will hope to eventually line up a new free-trade partnership with the bloc, yet in the meantime leaving the EU’s single market and customs union risks making it costlier and more complicated for British exporters to trade with their biggest market. It may also force banks to carry out their threats to move jobs from London to the continent to ensure they maintain access to it.
The Guardian breaks it down into three bullet points, noting that May’s speech to an audience of diplomats at London’s Lancaster House will make it clear the UK will…
- leave the EU customs union;
- regain full control of its borders, even if that means losing access to the single market, and
- cease to be subject to rulings by the European court of justice.
“She’s gone for the full works,” one source said. “People will know when she said ‘Brexit means Brexit’, she really meant it.”
May is expected to say the following:
One of the reasons that Britain’s democracy has been such a success for so many years is that the strength of our identity as one nation, the respect we show to one another as fellow citizens, and the importance we attach to our institutions means that when a vote has been held we all respect the result. The victors have the responsibility to act magnanimously. The losers have the responsibility to respect the legitimacy of the result. And the country comes together. Now we need to put an end to the division and the language associated with it – leaver and remainer and all the accompanying insults – and unite to make a success of Brexit and build a truly global Britain.
So just what kind of hit are we talking about for sterling due to May’s speech, you ask? Well, that of course is impossible to say ahead of time, but you can bet it won’t be pretty and you’d certainly think we’ll see cable react well before the PM actually speaks.
For those interested, below, find a bit of color from Goldman who last week noted that May’s recent comments confirmed her vision for a hard Brexit, presaging additional downside for GBPUSD.
We see the path for the British Pound as a function of two things. First, there is the question of where GBP/$ would trade in the event of a “hard Brexit.” We have used several approaches to show that Sterling could fall between 20-40 percent relative to pre-referendum levels, with a low of 1.10 for GBP/$ quite possible. Second, what probability should markets assign to “hard Brexit.” In our minds, it has been this probability that has been moving the Pound around since June of last year. In particular, the political vacuum following the referendum meant that there was some probability that Article 50 might never be triggered. In the presence of large speculative shorts, this kept the Pound supported after its initial referendum fall. But the Conservative party conference changed that, with Prime Minster May committing to trigger Article 50 by March. We thought the market would price a greater probability of “hard Brexit” as a result, reiterating our near-term target of 1.20 for Cable in the days ahead of the ‘flash crash’. The November High Court decision was a move back in the opposite direction, reducing in the market’s eyes the odds that Article 50 could be triggered by March and, more fundamentally, limiting how aggressive the government could be in its negotiating position. This buoyed Cable, pushing it back up towards 1.28 and pre- ’flash crash’ levels in mid-December (Exhibit 1). However, our underlying conviction is that Sterling needs to weaken quite a bit more, given that the trade-weighted decline is only 13 percent so far (Exhibit 2), well shy of our 20-40 percent range. We think the most recent decline, sparked by Prime Minister May’s latest speech re- affirming her Brexit vision, is the start of that process, with the FX market only beginning to re-engage in the idiosyncratic Sterling down story.
Here’s some context for Goldman’s 1.10 call:
It should be noted that this is what happens when an outpouring of anti-establishment sentiment drummed up and perpetuated by populist candidates seeking to capitalize on the public’s fears ends up leading voters astray.
Put differently, FX turmoil and economic uncertainty take hold when globalization is shunned in favor of a more inward-looking, nationalist ideology that promises to curtail threats to society and restore some kind of bygone prosperity that populist politicians imagine has been lost.
In the end, you can argue for protectionism and against progressivism and multiculturalism all you want, but what you can’t do is stop the market from rendering its own judgement. In this case, the verdict appears to be “guilty as charged.”