The pound erased all of its gains since an exit poll that predicted a Conservative majority in last week’s election, and UK-focused stocks fell by over 1%, as the threat of no deal Brexit was revived.
Sterling dropped by the most since July after Prime Minister Boris Johnson said he would fix a hard deadline of December 2020 to reach a trade deal with the European Union.
The currency’s one-year implied volatility was headed for the biggest jump since May. “Those who thought that a big majority would free the prime minister to take a patient approach to negotiate the best possible deal have been caught by surprise,” said Kit Juckes, chief foreign-exchange strategist at Societe Generale SA.
“And that’s most UK economists and strategists.” For JPMorgan Chase & Co, the risk of a no-deal Brexit remains at an “uncomfortably high” 25% following the election win. The UK currency had gained significant ground on hopes a strong Conservative majority would lead to a speedy resolution to the Brexit deadlock.
The most bullish forecasts, which call for a rally to $1.40 or beyond, depend on a market-friendly exit from the EU, which now looks at risk with the return of Johnson’s hard line negotiating strategy.
The bank’s economist Allan Monks wrote in a research note dated December 13 that while Johnson’s sturdy majority means “the indecision and domestic delays” of the past two years should be over, it also means the government is likely to take a forceful approach in the upcoming negotiations.
The pound weakened by 1.2% against the euro. The FTSE 250, the UK’s domestically-skewed stock index, fell by as much as 1.7% with declines for banks and retailers. The FTSE 100, home to a range of multinationals that benefit from a weaker pound, held steady. UK government debt rallied, outperforming its European peers, with the yield on 10-year gilts down five basis points to 0.78% Sterling advanced to as high as $1.3514 on Friday, reached as an exit poll predicted the Conservative Party’s sweeping victory in the general election Ark Capital’s Saed Abukarsh discusses the impact of a hard Brexit on the pound.
EU leaders have warned it’s highly unlikely that negotiators will be able to complete the kind of deal Johnson wants – which he’s modelled on Canada’s agreement with the EU – in the 11 months between Brexit day January 31 and the December deadline.
This sets up a fresh cliff-edge for a no-deal split with the EU at the end of 2020. “It is fitting that the main culprit for the reversal is PM Johnson himself with his potentially ill-advised decision to block any chance of extending the transition period beyond December 2020,” said Valentin Marinov, head of Group-of-10 currency strategy at Credit Agricole SA.
The UK currency has been at the centre of a shift in positioning around the election campaign, which may be tested by the new government’s Brexit strategy. A Citigroup Inc index indicates that currency funds have almost completely unwound their bearish bets on sterling.
Asset managers have also switched to a net long position position in the pound from a net short before the vote, data from the Commodity Futures Trading Commission showed.
Some hedge fund clients are already buying puts – or options that bet on the currency dropping below a specified level – for the next 12 months, according to Philippos Kassimatis, a co-founder of hedging advisory firm Maven Global.
Still, one-year risk reversals are near the least bearish level since July 2018, suggesting not everyone is in a rush to hedge.
If the law is passed, “it would erode all the positives of a large Tory majority and bring us back to previous position of pound uncertainty rising rather than falling next year,” Elsa Lignos, global head of currency strategy at Royal Bank of Canada, wrote in a research note.
from Gulf Times https://ift.tt/38QQGXL
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