Sterling bulls expect Brexit deal or delay

Could the year’s surprise be Parliament’s acceptance of Theresa May’s Brexit deal? Perhaps that is why currency traders are buying the pound.

Currency and stock markets are betting that the UK will avoid crashing out of the European Union with no deal. Firm sterling and UK shares and bonds illustrate the view that either Prime Minister Theresa May’s latest strategy will work or parliamentary amendments will prevent a no deal scenario.

There could be a surprise May win for her Brexit agreement if the majority of Tories turn against Dominic Grieve & other ultra Remainers. MPs originally voted by 432 votes to 202 to reject the deal. This is how the numbers could change. Say 307 Conservative Brexitiers & other Tories back a tweaked deal. If DUP MPs follow, the prime minister would have 317 votes. She would then need only 9 Labour & independent Brexitiers to back her deal. Note, 6 of them backed her in the first round.

Since sterling’s 2019 low at the beginning of January, the currency – albeit slightly below its recent peak – has risen by 5 per cent against the US dollar, by 4.5 per cent against the euro and by 4 per cent against the Singapore dollar. The FTSE 100 index, also marginally below its January top, is 6.4 per cent higher than its late December 2018 low.

Steve Barrow, currency strategist at Standard Bank, maintains that the pound is undervalued. Currency traders and businesses hedged against a no deal scenario and further devaluation by selling sterling short in the futures and options market. If Brexit is settled favourably, these currency participants would cover their positions and the pound would rally sharply. The pound has already begun to revive because some traders have already been buying back the currency on the derivatives market. Mr Barrow predicts 1.40 against the US dollar, later this year. Longer term the currency could weaken in tandem with the economy.

Hedge funds and other bears have covered their sterling shorts causing currency to rally

Mrs May’s strategy to get her deal over the line

Following an overwhelming victory against Labour’s no confidence in the government motion, Mrs May has reverted to her traditional supporters. She has decided to rely on Brexiteer, other Tory MPs and the Democratic Unionist Party (DUP) to back her Brexit withdrawal deal. She has promised them tweaks. Mrs May overwhelmingly lost the first vote on her deal because these MPs did not support it. The main reason was dissatisfaction with the so-called “backstop” to ensure that the border between Ireland and Northern Ireland remains open. This effective insurance deal would come into play if the government failed to negotiate a trade deal with the EU by the end of 2021. Brexiteer and DUP MPs have been concerned as the backstop would require the UK to remain in the EU’s customs union in perpetuity. The country would thus be unable to negotiate independent trade deals with the US, Asia and other countries.
Following government discussions, these MPs have become more flexible. But the proviso is that the 27 EU nations make a legal provision in the withdrawal accord that there would be a time limit to the backstop.

Already there are indications that the Irish government is beginning to bend.

Discussions with party leaders

Labour leader, Jeremy Corbyn has refused Mrs May’s offer to discuss Brexit. Instead, she has been meeting other party leaders and Labour MPs who are involved in the Brexit process. Some want a second referendum, others a permanent customs union with the EU, others a so-called “Norway plus” option that keeps the UK in the EU single market and customs union. A vote, however, is necessary for all these options, but few commentators believe that they would achieve a majority.

Mrs May’s hopes

In a statement, Mrs May said that she had identified three key changes which could secure Parliamentary support for a deal. Firstly that her government would be more “flexible, open and inclusive” in engaging parliament in their negotiations with the EU. Secondly, they would embed protections on worker rights and environment, and finally that the government would work to ensure that the Northern Irish border issue is resolved in a way that both the EU and UK can support.
Mrs May remained adamant that she would not support a second referendum. She also refused to rule out a no-deal Brexit as the EU also fears such an outcome. This possibility is a negotiating tool to persuade Ireland and the EU to be more flexible about the backstop.

If Mrs May’s strategy fails, the markets believe that parliament will still be able to prevent a no-deal scenario.

Several amendments to the withdrawal legislation are aimed at extending the March 29 withdrawal date. This would open the door to a potential referendum. The hope then, according to proponents of this outcome, is that voters would change their minds and choose to remain in the EU.

© Copyright Neil Behrmann
This article was first published in The Business Times, Singapore Neil Behrmann is London correspondent of The Business Times. Jack of Diamonds his thriller on global diamond mining and smuggling, has recently been published. It is the sequel to the thriller, Trader Jack, The Story of Jack Miner.
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