Despite the ticking clock, some optimism over sterling

Analysts are more optimistic than the UK government that an agreement will be reached with the EU next month to move Brexit talks on to trade, even as Theresa May’s political troubles continue to weigh on the country’s beleaguered currency.

A Bloomberg survey of seven banks pegged the odds of a UK-EU accord in December at 68%. That’s more than UK Brexit secretary David Davis, who put the chances of a breakthrough by December at 50-50, according to European business leaders he briefed at a meeting this week. His spokesman, however, denies he made the comment.

Commonwealth Bank of Australia’s Peter Kinsella sees the probability of a deal at 80%, the highest in the survey, with the lowest estimated by Mizuho Bank’s Neil Jones at 35%.

The most bullish sterling forecast is from Nomura International, which sees it rising 7% to $1.40 by year-end on the back of deal, while Commerzbank’s call for the currency to weaken as much as 10% in the absence of an agreement is the most bearish.

Sterling fell as much as 1% earlier this week to $1.3062 after the Sunday Times reported 40 members of the UK parliament were ready to sign a letter of no confidence in the British prime minister.

It later pared losses to close at 1.3116, before slipping again by 0.3% in the most recent session.

The opposition Labour party accused Ms May of lacking the support of her own party to deliver the Brexit transition period she’s proposed. Implied volatility on pound-dollar options expiring in a month jumped 151 basis points over the past two days, heading for the biggest such increase since October 2016.

With just over two weeks until EU officials meet in Brussels and begin drafting the conclusions for the December EU summit, Britain needs to make an offer on the divorce bill to move talks on to trade. Despite a ticking clock and a weakened government, strategists are optimistic that the UK will agree to a deal in time, boosting the pound.

Here’s a roundup of analysts’ views ahead of the December meeting:

Nomura International sees a 60% probability that the EU will allow talks to move on to trade in December.

“The leaked letter is just capturing people’s attention,” says currency strategist Jordan Rochester, referring to the Sunday Times story. “My mind will change if 40 MPs become 48,” Mr Rochetser said.

“It still requires Theresa May to do something in the next two weeks but I am assuming she will do just enough to get things moving as it’s not in her interest to slow things down further,” said Commonwealth Bank of Australia.

“The UK has a history of playing this domestic political uncertainty with Brussels and extracting concessions from Brussels,” says Mr Kinsella, senior currency and rates strategist at Commonwealth. He sees an 80% probability of a December deal. The pound is “priced in for the very negative scenarios” meaning it could gain up to 3% if progress is announced in December, sais Mr Kinsella.

Standard Bank head of currency strategy Steven Barrow sees the likelihood of talks advancing to trade in December as “quite high, 75%”.

“The market clearly seems more worried after the weekend but I don’t think the stories made much difference,” he said.

Mr Barrow sees the pound gaining to $1.32 on a December agreement

Commerzbank sees the probability of moving talks with the EU on to trade following the December summit is “a little below 50%,” said economist Peter Dixon.

“Both sides want to come to an arrangement, but the British are dragging their heels on accepting the extent of their liabilities,” he said.

Mr Dixon added:

“Two of the three issues on the EU’s agenda have not been taken sufficiently seriously by the UK.”

For the pound, “the risks are for a much sharper depreciation due to the lingering risk that the negotiations fail,” according to currency strategist Thu Lan Nguyen Mizuho at Commerzbank.

There is a 35% chance of a deal by December, according to head of hedge fund sales Neil Jones at Mizhuo.

The market’s thinking is that Ms May is on the way out, given only another eight votes are required to oust her, said Mr Jones, referring to the newspaper story.

He sees the pound around $1.35 if progress in December, and “$1.28 initially” if there is no agreement.

Bloomberg


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