Here’s What FX Traders Should Watch as May Faces Brexit Votes
LONDON (Capital Markets in Africa) – The pound is vulnerable to swings Tuesday as traders tweak positions ahead of votes by lawmakers to change Theresa May’s Brexit deal.
The currency could climb to levels not seen in six months if Parliament votes to accept what has come to be known as the Cooper-Boles amendment, which seeks to defer Britain’s departure from the European Union should the prime minister not win approval for her deal by a certain date.
Yet it could lose some of this year’s gains if a rival proposal is passed to change the plan to avoid a hard Irish border and send May back to the negotiating table with the EU. The prime minister backed this amendment late Monday to increase its chances, sending the pound lower Tuesday.
Parliament will vote on proposed changes to May’s beleaguered Brexit plan from 7 p.m. London time, with Speaker John Bercow choosing which amendments get picked. Various proposals aim to give lawmakers more control, delay taking the U.K. out of the bloc, avoid no deal or change the Irish backstop. These are the amendments the market is focusing on:
Cooper-Boles Delay
Amendment: This cross-party effort, by Labour lawmaker Yvette Cooper and Conservative politician Nick Boles, would set a time limit beyond which the prime minister would have to ask for an Article 50 extension until the end of the year if no agreement has been struck.
Pound reaction: “Cooper/Boles we think is small upside for the pound, as delay is always preferable to a forced decision,” said Royal Bank of Canada’s chief currency strategist Adam Cole.
Lee Hardman, an analyst at MUFG, sees the pound rallying as much as 1.6 percent to $1.3370 under this scenario, a level the currency hasn’t reached since June 2018. Banco Santander SA’s head of Group-of-10 currency strategy Stuart Bennett agrees, putting the currency between $1.33 and $1.34.
Change Backstop
The amendment: A proposal aimed at getting May back to Brussels to renegotiate the Irish backstop has been submitted by Conservative backbenchers Andrew Murrison and Graham Brady. It calls for the Irish border proposal to be replaced with “alternative arrangements.” May threw her weight behind this Monday in an effort to keep her party united, even it would wreck her agreement with the EU, which has said there is little chance of removing the backstop.
Pound reaction: Anything that means the EU has to re-open negotiations would be taken negatively, according to Russell Silberston, a portfolio manager at Investec Asset Management. It would result in “even more uncertainty and possibly a step backwards,” he said.
If the Cooper amendment fails and this one passes, the pound could drop as much as 2 percent on a trade-weighted basis, according to Silberston. It could hit $1.31, according to MUFG’s Hardman.
“The Brady amendment will still fail, but by a much smaller margin than the original bill, which will give her something to go back to Europe with,” said RBC’s Cole. “To the extent that does not really resolve anything and just leaves the uncertainty overhanging, it is probably a small negative for sterling.”
Spelman No Deal
Former Conservative minister Caroline Spelman and Labour’s Jack Dromeyhave joined forces to table an amendment to stop a no-deal Brexit.
Pound reaction: “In case of the Spelman amendment, the pound should react positively, as no deal would be ruled out, although it remains unclear how this would be done in practice,” said Thu Lan Nguyen, a currency strategist at Commerzbank AG.
Rabobank’s head of currency strategy, Jane Foley, expects the Spelman amendment would be “most positive since it would remove the threat of no deal.” Still, $1.32 would likely remain a tough hurdle for the currency to clear as the amendment being approved doesn’t remove the uncertainty around how to move forward.
Source: Bloomberg Business News