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GBP: ‘Brexit’ deal divides the Conservative party, highlighting risks - MUFG

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Dec 21, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    FXStreet (Delhi) – Derek Halpenny, European Head of GMR at MUFG, suggests that recent days may offer a taste of what is to come in 2016 as PM Cameron faces a backlash from disgruntled Tories who claim his negotiations for reforming Europe have amounted to very little.

    Key Quotes

    “Steve Baker, the leader of 'Conservatives for Britain' warned PM Cameron that over half of the party would vote to leave the EU. He described the reforms agreed as "inconsequential" and that hostility in the party was hardening and the "pathway" that PM Cameron can now envisage toward a formal deal in February would not be enough to appease a very large portion of his own party.”

    “In any case, what is becoming clear is that PM Cameron is shifting gears with a focus on getting a deal agreed by the EU leaders’ summit in February. That would obviously increase speculation that the government is pushing for a referendum as early as before the summer break- so June or early July. Pushing for a referendum as quickly as possible makes sense. It reduces the risk of something else going wrong that could shift the balance toward the "Leave" Campaign. A worsening of the migrant crisis, a terrorist attack conducted by recently arrived migrants and/or an economic downturn could all impact a referendum result. Currently most polls show a majority in favour of staying although there was a Lord Ashcroft poll last week that showed a majority in favour of leaving.”

    “A shift in gears by PM Cameron and a possible summer 2016 referendum is likely to mean an upturn in volatility for the pound. The UK has close to a record current account deficit and is dependent on external financing to the tune of just over 5% of GDP - a record size deficit for the UK. Data for the third quarter will be released this week with the deficit expected to widen from GBP 16.8bn in Q2 to GBP 21.5bn in Q3. FDI makes up a notable portion of this financing and fears over a break from the EU may start to undermine that flow next year, which would leave the UK more dependent on less reliable short-term financing.”

    “Martin Weale over the weekend hinted that his timing of when a rate increase might be required has been pushed back given the recent drop in crude oil prices and the slowdown in wage growth. A further push back of rate hike expectations may mean further selling of the pound over the short-term.”

    “However, continued pound selling may in fact start to play a part in the BOE needing to act. The pound on a trade-weighted basis is up over 21% since the low in March 2013. ‘Brexit’ uncertainty could see this strength unwind rapidly in Q1 next year which may well change the inflation outlook to such an extent that monetary tightening is required. We still see a high chance of the BOE acting to hike rates in May, but perhaps by then the pound will be at much weaker levels than today.”
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