A stronger pound? What forex traders should watch for as Brexit looms
Of all the permutations from another round of Brexit votes on Tuesday (Jan 29, Singapore time Wednesday), the most likely result for markets is a stronger pound.
The currency will climb to levels not seen in six months if the UK 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 Prime Minister Theresa May not win approval for her deal by a certain date.
Parliament will vote on proposed changes to May's beleaguered Brexit plan from 7pm London time on Tuesday (3am Singapore time Wednesday), with Speaker John Bercow choosing which amendments get picked. Various proposals aim to give lawmakers more control, delay taking the UK out of the bloc, avoid no deal or change the Irish backstop. These are the amendments the market is focusing on:
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 per cent to US$1.3370 (S$1.8085) under this scenario, a level the currency has not reached since June 2018. Banco Santander SA's head of Group-of-10 currency strategy Stuart Bennett agrees, putting the currency between US$1.33 and US$1.34.
The amendments: Two proposals aimed at getting May back to Brussels to renegotiate the Irish backstop have been submitted by Conservative backbencher Andrew Murrison. One asks for a time limit to be added, the other for the Irish border proposal to be replaced with "alternative arrangements".
Pound reaction: Anything that tries to put a time limit on the backstop or means the EU has to reopen 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 per cent on a trade-weighted basis, according to Silberston. It could hit US$1.31, according to MUFG's Hardman. However, a group of pro-Brexit lawmakers led by Jacob Rees-Mogg is not planning to back these amendments, giving them little chance of success.
SPELMAN NO DEAL
Former Conservative minister Caroline Spelman and Labour's Jack Dromey have 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, US$1.32 would likely remain a tough hurdle for the currency to clear as the amendment being approved does not remove the uncertainty around how to move forward.