There May Be a Limit to How Long Johnson Can Dismiss Pound Slide
The pound’s relentless grind lower has done little to sway U.K. PM from his tough line on Brexit. It may be just a matter of time.
(Bloomberg) --
The pound’s relentless grind lower has done little to sway U.K. Prime Minister Boris Johnson so far from his tough line on Brexit. It may be just a matter of time.
A plunge of about 10% in sterling in a short span of time may cause Johnson’s cabinet to refrain from pursuing a no-deal exit, according to Commerzbank. A decline that takes the currency below $1.19 would leave markets in “uncharted waters”, says Manulife Asset Management that oversees almost $400 billion.
Emerging as the market’s real-time barometer of Brexit sentiment, the pound is headed for the biggest monthly drop since October 2016. Johnson, who took office earlier this month, hinted he may hold no negotiations with the European Union before the Brexit deadline on Oct. 31.
“We have seen from time to time that the market is able to put pressure on governments,” said Thu Lan Nguyen, a currency strategist at Commerbank AG. “Increasing market turmoil could put the government under pressure to refrain from a no-deal Brexit. As a pain threshold, I could imagine a depreciation just above 10% in a short time that takes the currency close to parity against euro.”
Sterling traded around $1.2168 on Wednesday, having weakened more than 4% this month 2017. The pound was at 91.62 pence per euro.
Some Conservatives privately expressed anxiety over the slide in sterling. One of Johnson’s senior officials, who asked not to be identified, said the markets were now waking up to the realistic prospect of a no-deal exit and that the government wasn’t about to soften its tone.
Too Early
A messy departure from the EU has long been deemed the worst-case scenario by markets. Those fears crystallized after Johnson appointed Brexiteers to key government positions and demanded changes to the existing agreement with the EU, which Brussels has ruled out.
Still, some analysts say it’s a bit too early for the tremors in the pound to be upsetting the political calculations at 10 Downing Street.
“The government has a pain threshold, but we’re not there yet,” said Ned Rumpeltin, head of currency strategy at Toronto-Dominion Bank. “It’s too early into Johnson’s term for him to be seen as being brought to heel by the markets. It may not be a level, per se, but may be more a function of the speed with which the pound may collapse that attracts their attention.”
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With lawmakers on recess until early September and the Bank of England silent before its policy decision on Thursday, investors say the currency is bound to fall further in the weeks to come.
“Ultimately it’s the pound that takes the Brexit strain,” said Grant Peterkin, a senior managing director at Manulife Asset Management which manages $386 billion in assets globally. “It’s the purest way to reflect the concerns financial markets have for the U.K. economy.”
Manulife Asset Management’s Absolute Return Rates Fund is betting on further declines in sterling. “Into the $1.19s would be moving into relatively uncharted territory for cable,” Peterkin said.
--With assistance from John Ainger.
To contact the reporters on this story: Anooja Debnath in London at adebnath@bloomberg.net;Charlotte Ryan in London at cryan147@bloomberg.net
To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, William Shaw
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