28/08/19

UK: Johnson's Parliamentary Restriction Results in Pound Plummit

As published on uk.reuters.com, Wednesday August 28, 2019.

LONDON (Reuters) - The pound tumbled to its lowest in nearly a week on Wednesday and government bond yields fell after Prime Minister Boris Johnson moved to suspend parliament in September, leaving lawmakers little time to head off a no-deal Brexit.

Johnson said on Wednesday he would schedule a Queen’s Speech for Oct. 14 to launch new legislation. He denied he was seeking to prevent parliament from obstructing his Brexit plans.

However, the move would curtail the time available to lawmakers who want to prevent him from taking the country out of the European Union without an exit agreement.

The announcement took the edge off a pound rally on Tuesday, when it touched a one-month high on news opposition parties were thrashing out ways to block a hard Brexit.

“For the pound to recover the fall this morning, anti-no- deal MPs will have to get their acts together in the first weeks of September,” Jordan Rochester, a strategist at Nomura said, raising the odds of a no-deal Brexit to 44% vs 40% earlier.

Sterling dropped to a six-day low of $1.2156 and was trading 0.6% lower by 1100 GMT GBP=D3. It weakened to 91.265 pence against the euro, its lowest in nearly a week EURGBP=D3.

Brexit-sensitive easyJet and International Airlines Group (ICAG.L), the owner of British Airways, slumped 2% to 4%. Housebuilders such as Persimmon (PSN.L) and Taylor Wimpey (TW.L) were down 2%. The internationally oriented FTSE 100 .FTSE index, however, was buoyed by sterling's weakness.

As investors flocked into safer assets, British 10-year Gilts rose, pushing yields to their lowest in more than a week. Yields move inversely to bond prices.

Sterling’s decline may have been tempered by bearish views on the British currency - speculators had outstanding short sterling positions of some $7.028 billion as of Aug. 20, data from the Commodity Futures Trading Commission showed. That’s close to the levels held two and a half years ago.

It also remains unclear whether the queen will follow Johnson’s request, sending parliament into recess for five weeks instead of the usual three. Parliament returns from summer recess on Sept. 3, and another recess was expected between roughly Sept. 13 and Oct. 8.

“Many people don’t believe this could happen,” said Jane Foley, senior forex strategist at Rabobank. “It’s not a foregone conclusion that he (Johnson) will do that.”

But given Johnson’s apparent determination to take Britain out of the EU on Oct. 31, with or without a deal, derivatives markets indicate sterling is more likely to fall than rise in coming months.

Implied sterling-dollar volatility, a gauge of expected price swings, has surged to the highest since January, contrasting with other developed-market currencies, where volatility remains subdued.

The pound has lost 4.3% of its value against the dollar this year, but most investors are wary of buying it back just yet.

“Sterling is cheap, so we’re primed to increase our sterling exposure, but we won’t do that until we get some clarity on a no deal or deal,” said Rory McPherson, investment director at Psigma Investment Management.