Brexit: Neverending saga
As the year draws to a close, emerging markets investors are likely to be happy to turn the page. But in the UK, the Brexit drama continues to rattle politics, markets and consumer confidence, all following a downside pattern. Let me sum up a few events that shaped the markets and give a glimpse of market watchers’ views.
UK Prime Minister May emerged victorious from a no-confidence vote in the House of Commons on December 13. But far from a victory that can launch a sustainable recovery, it is more like a victory that will bring further short-term turmoil for the pound. Teresa May might have fought off the hard Brexiteers in the Conservative Party who want to bring her down and change the course of Brexit, but this is only the first of many challenges – and they are likely to get harder, not easier. For a start, victory was not a guarantee of success when it comes to the Brexit vote. May’s victory over the hard Brexiteers has failed to cast any light on the Brexit outlook.
A ‘no deal’ exit, a second referendum, a cosmetically-adjusted version of the current deal and an extended period before the UK leaves the European Union, are all possible. The pound is still trading about 8 percent (in real effective terms) above its 1976 low, and 15 percent below its post-Bretton Woods average.
If the UK leaves the EU next March without a deal, analysts agree that the pound exchange rate would fall to $1.20/pound, roughly where it got to after the Brexit vote. But if the UK crashes out of the EU, the exchange rate may drop to something like $1.12/pound. Another possibility is Article 50 being revoked before, or extended beyond, March 29. This will have to happen if the UK Parliament is neither willing to ratify May’s deal nor accept the UK is leaving the EU without a deal.
Investors may see less upside for sterling if the PM gets her deal ratified. They may think that extending Article 50 would not give the currency a lift, amid the possibilities of “Leave” winning another referendum and Labour gaining power – which hasn’t tended to result well for sterling in the past. And they may see more downside for the pound in the event of a no deal Brexit. For now, market participants agree that the pound will bump along the bottom of this range, unable to justify a significant rally unless a hard Brexit is ruled out.
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