(Bloomberg) -- As pound traders face up to the imminent prospect of a Conservative Party leadership contest, it’s worth remembering their reaction the last time around.
In the aftermath of the 2016 Brexit referendum, Boris Johnson’s shock decision to sit out the contest to replace then-Prime Minister David Cameron caused drama in Westminster -- and currency markets. The pound pushed higher, before eventually pulling back, as traders correctly bet his withdrawal would lead to a smoother transition to a Theresa May premiership.
While investors’ relationship with May has since soured, their view of Johnson remains just as downbeat. In fact, the top contender to replace the PM is seen as the most damaging for sterling -- at least, within the Tory party.
For many money managers, including Steve Eisman, opposition leader Jeremy Corbyn is a bigger threat. They’ve hardly been reassured by Labour Party comments in 2017, when it reportedly war-gamed the potential for a run on the currency should it take power.
The turmoil within the Conservatives could spur an early election, and subsequently open a path for Corbyn into Number 10 Downing Street. This potential quandary between Johnson or Corbyn could go a long way toward explaining the record-breaking slide in the pound.
©2019 Bloomberg L.P.
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