Possibility Of A Soft Brexit Excites Sterling (Too Early?)

After a little wobble, sterling has responded favorably to the resignation of the UK Brexit team led by David Davis. The idea is that a path to a softer Brexit is good for sterling. In fairness, it is a bit early to reach this conclusion, and the softer dollar tone puts wind in sterling's sale. There is a GBP244 mln sterling option at $1.3375 that expires today. The June highs were set in the $1.3450-$1.3470 area.  

The problem is that UK Prime Minister May has to navigate three separate forces, her own cabinet, Parliament, and the EC. With Davis' and team's departure, the cabinet appears to stand with her, though another defection or two might not surprise. However, Rees-Mogg has already threatened to oppose May's plan, and the battle in Parliament begins. The hard Brexit camp appears to be gearing up for a leadership challenge.  

There may be nothing quite like the resignation of the team responsible for the Brexit negotiations to demonstrate to the EC that May is on the ropes. Since her main challenge is from the hard Brexit camp, the EC must realize that if May is replaced it will be most likely be someone from the wing. However, at the same time, the EC cannot be pleased with May's proposal which in effect wants the benefits of the customs union for goods by not the services or people. Even from far away, it still looks like cherry-picking.  

On the data front, tomorrow is a big day for the UK. May trade and industrial output figures are due, and they are expected to be better than April, which will lend credence to ideas that the soft patch seen at the start of the year has ended. Also, the UK will introduce its monthly GDP estimate (May) and a rolling three-month estimate. Note that NIESR will also provide an estimate for June GDP tomorrow. It put May's growth at 0.2%. Canada also reports a monthly GDP estimate.  

The weaker dollar tone was seen in Asia, and even China's yuan strengthened. The dollar slipped almost 0.4% against the yuan to a little below CNY6.62. It has not traded below CNY6.60 since June 27. The offshore yuan (CNH) rose a little more than 0.5%, making it the strongest regional currency today. Chinese equities participated in the rally that lifted the MSCI Asia Pacific Index 1.2%, the first back-to-back gain in nearly a month and the most since June 4. Even though Korea's Kospi rallied, foreign investors were sellers and here in July through today have sold $168 mln. Foreign investors bought $183 mln of Taiwanese shares today, paring this month's net sales to a little less than $650 mln.  

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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