UK: Hard Brexit fears to recede further - MUFG

Derek Halpenny, European Head of GMR at MUFG, notes that the pound out-performed yesterday and has held on to those gains so far today – and for good reason too we believe.

Key Quotes

“For the first time since Brexit we have had two clear signals of a potential way in which progress might be made between the EU and the UK over reaching a deal on Brexit. First was the comment from David Davis, the Brexit Minister, who stated that the UK may be willing to pay into the EU budget in order to gain access to the Single Market. More importantly, second was the comment from EuroGroup President Dijsselbloem who stated that the EU may find a way for the UK to access the Single Market.”

“We see a certain credibility in these comments. We have written before of this potential avenue to a deal given the fact that PM May has only mentioned two ‘redlines’ in regard to Brexit negotiations – free movement across borders and the EU controlling UK sovereignty. The EU budget has never been mentioned. We are sure that was intentional from the outset and the UK government has always viewed payment for access as potentially being an avenue for achieving a good deal for the UK. This comment importantly has come from the top – the Brexit Minister himself and may well be the first indication that the government realises the demands of parliament may well have to be met – those demands centring on presenting to parliament its negotiating plans for when Article 50 is triggered. If the government has come to the conclusion that trying to avoid parliamentary consent may get bogged down in the courts – the best plan may be to push ahead with seeking a parliamentary vote anyway – David Davis’ comment in parliament yesterday could also therefore be an indication that Article 50 will be triggered on schedule before the end of March.”

“No doubt in the coming days we may get counter-comments on this idea – but that should not diminish the importance of these statements and the comments to us suggest a further easing in fears over a ‘hard’ disruptive Brexit that should allow the recent out-performance for the pound to continue. ‘Hard’ Brexit fears escalated in early October coinciding with the Tory Party Conference when PM May on 2nd October gave a speech on “Britain after Brexit”. In this speech for the first time PM May explicitly stated Article 50 would be invoked by end-March 2017.”

“After that speech, the pound fell notably but has since recovered from ‘Hard Brexit’ fear lows and is now stronger versus every G10 currency bar the US dollar and Canadian dollar. Given the current US dollar sentiment, we expect pound gains to continue to be more against non-dollar currencies as Brexit fears continue to recede. Given our bearish EUR stance, we see pound gains versus the euro as potentially the line of least resistance, with the potential for 0.8000 being tested in Q1 next year. If oil corrects lower, GBP/CAD could perform well.”