Believe it or not (and considering we’re talking about Boris Johnson, I don’t know why you wouldn’t believe it), the pound has managed to erase the entirety of the monumental rally that played out last week when exit polls tipped an 86-seat parliamentary majority for Conservatives, setting the stage for a prompt Brexit on January 31.
Sterling, you’ll recall, surged as much as 2.7%, the largest rally since January of 2017.
Fast forward to Tuesday, and it’s plunging, down more than 1%.
You’d be forgiven if you’re exhausted with monitoring this yearslong charade and thus aren’t entirely up to speed.
The problem, in the simplest possible terms, is that Boris has now raised the specter of a no-deal Brexit anew by altering the law to mandate the transition period doesn’t drag on past December 31, 2020.
Of course, sweeping trade deals take a while to negotiate, contrary to what you might be inclined to believe if you’re an “Art Of The Deal” disciple. In fact, the EU process generally takes several years.
Now, the UK faces a crash-out scenario this time next year unless the process can be completed in less than 12 months. Hence the plunging pound. And a sharp drop for the FTSE 250, which surged more than 5% intraday following the election last week. (The FTSE 100 is generally stable on Tuesday.)
“We know from price action this year, markets and potential overseas investors appear to avoid the pound under a hard no-deal scenario”, Neil Jones, who heads up currency sales for financial institutions at Mizuho Bank, said Tuesday.
ING chimed in, noting that “leaving without a trade deal at the end of next year is much the same as a hard Brexit and that’s clearly negative for sterling”. Given that, the bank says “any positive ‘hope’ premium is currently being priced out of GBP, and our short-term financial fair value model suggests that EUR/GBP is currently 0.8% undervalued versus the 2% undervaluation yesterday”.
On Friday afternoon, in the final Flows & Liquidity of 2019, JPMorgan’s Nikolaos Panigirtzoglou said the bank’s position proxies suggested long GBP positions had “increased further after the UK election with momentum signals entering overbought territory”.
SocGen’s Kit Juckes summed it up best on Tuesday. To wit:
Those who thought that a big majority would free the PM to take a patient approach to negotiate the best possible deal, have been caught by surprise. And that’s most UK economists and strategists. Ho hum. We have little to add to our underlying view that EUR/GBP will average 0.85 in 20202, but of course the tail risk of a disastrous exit and a spike in EUR/GBP to 0.95 has risen.
Just another day in geopolitical hell.