So Bad It’s Good: Analysts See Silver Lining in Brexit Rejection

(Bloomberg) -- Prime Minister Theresa May’s record defeat in Parliament over her Brexit divorce deal did little to dim a sudden unanimity among currency strategists that the pound is headed higher.

Sterling edged higher on Wednesday and the FTSE 250 Index of shares advanced despite the margin of May’s loss being above the threshold many analysts feared would trigger a rout. Even the prospect of a no confidence vote in the Prime Minister later this evening has done little to disrupt assets amid a general assumption that May will prevail. The one soft spot was gilts, which slipped -- though yields remain barely changed on the week.

Five out of eight analyst views compiled by Bloomberg projected improved prospects for sterling, with banks including Standard Chartered Plc and Credit Agricole SA saying that May will likely survive the no-confidence vote called by the opposition. Volatility on pound options slumped, indicating a pickup in confidence.

Here’s a selection of analyst and fund manager views:

Eurizon SLJ Capital (Pound undervalued)

• “This outcome is so dire for Brexit that the chances of a softer Brexit or even a second referendum may have risen,” says Stephen Jen, chief executive, who says fair value is between $1.50-$1.55
• The pound is “so weak and so cheap -- it is so undervalued”
• “I don’t know if it goes lower because it’s like stretched a rubber band”
• “Worst-case scenario is Corbyn becoming prime minister”
• “The policies won’t be helpful for the U.K. That may weigh on sterling”

Standard Chartered (Sterling will be supported)

• The pound will be broadly supported as market assigns a high chance the government will survive the confidence vote, a strong possibility Article 50 will be extended and a low prospect of a disorderly Brexit
• Expectation of a no-deal Brexit is low; if this happens, it will hurt GBP and risk sentiment, says Mayank Mishra, global macro and FX currency strategist in Singapore
• GBP can see a relief rally if there is a formal announcement of Article 50 extension or an increased possibility of a second referendum

Nomura (Re-enters short EUR/GBP position)

• Re-enters short EUR/GBP position at 0.8880, Jordan Rochester, G-10 currency strategist in London, writes in note
• The pound will benefit as the U.K. government is expected to survive no-confidence vote and markets will look forward to softer Brexit outcomes
• Market views Parliament to have a softer Brexit majority and one that is also against a no-deal Brexit
• Admitted the long GBP trade is quite risky; a loss for the government could send GBP gapping down by 3% or lower

Amplifying Global FX Capital (Pound positive)

• “This is positive for the pound,” says founder Greg Gibbs
• “The chances of a no-deal Brexit are so slim now it’s not even really worth considering anymore”
• “It looks increasingly that the resolution will be an even softer version than May’s proposal and/or a new referendum”

National Australia Bank (Low to mid $1.30s)

• “I don’t see GBP rallying much until markets are sure the Conservatives have seen off the confidence motion,” says Gavin Friend, senior markets strategist
• “Assuming it is, we continue to see GBP gradually climbing as Parliament moves on”
• “We have GBP moving into the low-to-mid $1.30s in the coming weeks”

Credit Agricole (Labour win unlikely)

• Pound traders are still in buy-the-rumor, sell-the-fact mode, according to Credit Agricole head of G-10 currency strategy Valentin Marinov
  • Corbyn is unlikely to succeed in ousting the government given that both the Tory party and the DUP are expected to support the government, he says

Aberdeen Standard (Pound to be volatile)

• I’d expect sterling to be volatile until the result of the no-confidence vote is known, says Stephanie Kelly, a political economist in Edinburgh
• With the DUP saying they’ll back the Conservatives, the no-confidence vote is dead in the water unless there’s a big rebellion within the Conservative party
• If May wins the no-confidence vote, then we are going to essentially be in the same place as if the vote had happened four weeks ago but with a tighter timeline to Article 50 ending

Columbia Threadneedle (Not seen the worst)

• The market hasn’t yet seen the worst for the embattled currency, as GBP/USD is still in line with the past month’s average level around $1.28, says Ed Al-Hussainy
• “On a volatility adjusted basis, being short USD vs GBP is still unattractive from my perspective, even though the payoff can appear asymmetric in favor of GBP”
• Investors are still heavily short and they will “cover aggressively in every instance where we are able to reduce the odds of a hard Brexit”

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