By the title, you could be excused for thinking that I am about to trot out a host of reasons why the Sterling should be considered a buy, though, at this stage, it would be premature (amongst other things) to fight the negative sentiment which is predominantly based on high uncertainty. That, by and large, has not changed, and into the meaningful vote on the current EU deal next week, it is hard to envisage any material confidence in the UK’s position and indeed Sterling.
However, last night’s series of motions against the PM ended with parliament voting in favour of greater powers for the Commons as a whole, to engage in the Brexit process if (or when) the deal is voted down on Tuesday. Having reiterated that this would risk a no deal or no Brexit, the focus has naturally been on the latter, where only a second referendum, either through a turnaround by the current government or after a general election could facilitate this – assuming the electorate did not vote to leave again(!).
Odds for (effectively) canceling Brexit have naturally risen as a result, and those with an eye on the markets during last night’s session parliament would have noticed the bump higher in the Pound once the last motion (mentioned above) was won by a narrow majority, as were the previous two. At this stage, exchange rate stability is the best we can hope for with the modest recovery a function of the increased odds of no Brexit at all – however that comes about.
Not that GBP was materially affected over Tuesday’s, as some of the cross rates showed. GBP vs the commodity currencies and most notably CAD were an example that the push lower was engineered to a larger degree, with US markets taking full advantage of thin markets to push for levels as we have seen in many instances in the past. It would not surprise me to hear that the BoE will be continuously on red alert in order to avoid another flash crash to the order that we saw in September 2016.
Looking at the GBP/CAD chart, we can see that no fresh lows were forthcoming, and indeed, vs the EUR, we also saw a limited move which ran out of steam despite taking out some resistance above the 0.8900 level. Cable, therefore, looked to be the solitary target, having repeatedly tested the 1.2700. Well, we gave way and touching on 1.2660 again, we saw momentum swiftly fade which leads us to believe that there is significant demand at these levels if not lower. As Raj will show you on the weekly chart, 1.2500-1.2600 looks pretty significant.
From a longer-term perspective, the argument for a higher GBP rate at this stage is all based on longer-term valuations, which on OECD/PPP measures lies closer to the 1.4000 mark. This narrative was given credence earlier in the year, though largely off the back of a weaker USD, which as we know is now king based on US economic supremacy as well its safe haven status based on liquidity first and foremost.
Over the coming week, we expect to see plenty of twists and turns within parliament, though it is worth noting that there was an overriding consensus within the Commons to avoid a no deal outcome. Whether this can translate into something tangible rather than purely ideological remains to be seen, though does take a chunk out of the ‘hard Brexit’ mantra which has been damaging on the Pound. For this reason, I will take issue with some of the projections of a Sterling rate falling to new cycle lows, 1.1500, 1.1200, 1.1000 and parity all cited by some corners of the market and suggest that it will take a monumental and determined effort by the UK parliament to lead us into a cliff edge Brexit which would lead to a capitulation in Sterling to this degree. The political will is clearly there to avoid this. If politics is driving GBP, then perhaps we could see probabilistic factors ‘repricing’ exchange rate levels a little higher.