At a certain point I suppose one just has to resign oneself to reality, even if that reality is preposterous or otherwise objectionable.
Such is the plight of the UK and all of the voters who very clearly didn’t have any idea what they were choosing to “exit” when they elected to leave the EU last summer…
Over the last two months I’ve documented the trials and tribulations of the pound on any number of occasions. For those who missed it, here are a few of the relevant posts:
- Thanks Populism: Brexit May Make British Pound “Irrelevant”
- Anatomy Of A Flash Crashing Black Swan
- A “Clean And Hard” Pounding: Complete Recap Of Pound’s Rough Day
- Pound Plunges On Brexit Fears
- Sterling Spikes As May Delivers Brexit Speech
Now days, the best way forward for the currency that Deutsche Bank suggested may soon become “irrelevant” may be for lawmakers to simply roll over and choose the path of least resistance. Even if the long-term outlook for the British economy after Brexit is indeterminate (at best), any additional bickering may simply create further FX turmoil.
I thought, given that the market’s focus has shifted squarely to the euro over the past couple of weeks amid the unfolding French election drama, it was a good time to highlight the following commentary from Bloomberg’s Mark Cudmore who notes that “the dynamics of sterling have shifted.”
Clarity is highly valued by investors. As a result, the next few weeks provide a perilous path for the pound.
- The dynamics of sterling have shifted. With Brexit now seen as largely inevitable, any delay or confusion will be a negative for the currency. The pound strengthened on news that the Article 50 Bill passed its first test in the House of Lords
- Financial markets have had a long time to come to terms with the reality of Brexit and have made their best attempt to price in the path and likely effects. It would be more disruptive now for markets if the process were halted or subject to a period of political uncertainty
- The first major pitfall may come next week if the House of Lords amends the draft bill in any substantial way
- The House of Commons would then attempt to undo those changes in March, providing more confusion for traders
- Given May has the numbers in the lower house, the Bill would then be resubmitted to the House of Lords in original form. Legislative ping pong could ensue, potentially delaying the passing of the bill until next year
- An amended or delayed bill would both be negative outcomes for sterling in the short-term, as investors have to price in a new game plan. Such a scenario would also be a major blow to the government and could prompt May to call an election and seek a stronger mandate for Brexit
- The signs indicate she would receive such a mandate. Not just due to the lack of serious opposition, but also because the latest ICM poll showed that 68% of voters now want the U.K. to get on with implementing the referendum result. That’s up from 54% in December
- It’s now clear that — the efforts of Tony Blair aside — Brexit is extremely unlikely to be blocked. For markets at this point, the smoothest journey to that outcome is best. That wouldn’t mean necessarily that sterling’s most perilous days were behind it, just that the particular set of perils is one that the market had already begun to deal with
Oh, and for good measure, here are some fun comments out this afternoon from Marine Le Pen:
[Theresa May] is running the U.K. policies using policies that I want to run. She’s allowed her currency to return to a level that has helped exports explode. All the lights are green in the U.K. and all those who predicted apocalypse got it wrong.