Snap! Crackle... Pop? The UK election's meaning for sterling

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Cody McCarthy
6 years ago
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1 Snap! Crackle... Pop? The UK election's meaning for sterling

2 Jeremy Cook Chief Economist and Head of Currency Strategy

3 Called by Theresa May a little after Easter as a need to heal divisions within Westminster following the EU referendum Polling day is June 8 th (a week tomorrow) Exit polls available as polls close by 10pm Exit polls were extremely accurate in 2015 and 2010, opinion polls not so much Turnout will once again be crucial given a reported increase in voter registrations in 18-24yr demographic prior to the application closure date. Previous elections that broke with the 5 year frequency have seen lower than usual turnouts was a June election where turnout fell below 60% for the first time since Political fatigue is setting in though (not just commentators!)

4 Party Candidate Conservative and Unionist Party 638 Labour Party 631 Liberal Democrats 629 Green Party of England and Wales 457 UKIP 378 Independent 187 SNP 59 Plaid Cymru 40 Christian Peoples Alliance 31 The Yorkshire Party 21 Alliance Party of Northern Ireland 18 Social Democratic & Labour Party 18 Sinn Féin 18 Democratic Unionist Party 17 Ulster Unionist Party 14 Official Monster Raving Loony Party 12 British National Party 10 Pirate Party 10

5 CON (%) LAB (%) LD (%) UKIP (%) Grn (%) Source: Ukpollingreport

6 CON (%) LAB (%) LD (%) UKIP (%) Grn (%) Source: Ukpollingreport

7 Source: Yougov

8 Idiosyncratic risks give way to a GBP focus GBPUSD GBPEUR Tradeweighted sterling Source: Bloomberg

9 6 Slight negative sterling bias in options markets GBPUSD 1M Risk Reversal GBPUSD 3M Risk Reversal GBPEUR 1M Risk Reversal GBPEUR 3M Risk Reversal Source: Bloomberg

10 Fall off has been in the past week or so GBPUSD 1M Risk Reversal GBPUSD 3M Risk Reversal GBPEUR 1M Risk Reversal GBPEUR 3M Risk Reversal Source: Bloomberg

11 Source: Bloomberg

12 3 scenarios of the UK election translate very simply into outcomes as they pertain to Brexit A decent Tory majority (more than before the election was called) A diminished Tory majority (fewer than before the elections was called) A hung parliament A decent Tory majority is still the most likely and the status quo for Brexit negotiations as it stands at the moment. Campaign has hinged on stronger hand although we have our doubts that that will materialise. A cabinet reshuffle is very likely. A diminished Tory majority could trigger another Tory leadership contest and will see leadership on Brexit issues pass to David Davis A hung parliament would limit any negotiations taking place until a coalition was built which is an unlikely conclusion. If a coalition was formed there is a slim chance of a softer Brexit if language around immigration can soften.

13 YEAR MONTH DAY EUROPEAN UNION INDIVIDUAL EUROPEAN NATIONS UK March 29 Article 50 triggered Article 50 triggered April EU Council on Brexit Guidelines French Elections: First round 7 German Regional Elections: Schleswig-Holstein May 7 14 French Elections: Second round German Regional Elections: North Rhine-Westphalia elections 25 NATO Leaders meeting NATO Leaders meeting NATO Leaders meeting 26 G7 Summit G7 Summit G7 Summit 8 UK General Election June 11 or European Council French Elections: Legislative 2017 July TBC 8 Greek Bailout review G20 Meeting in Hamburg G20 Meeting in Hamburg G20 Meeting in Hamburg 11 Norway General Elections September German Federal Elections Lib Dem Party Conference TBA Possible Catalonia Independence Referendum TBA Conservative Party Conference October European Council TBC Luxembourg Parliamentary Elections November TBC Slovenia Presidential Elections 17 European Social Summit December European Council WTO Ministerial conference TBA European Parliament Elections European Parliament Elections European Parliament Elections TBA Austrian Parliamentary Elections January 28 Finland Presidential Elections 2018 March June End of Q European Council Soft deadline for negotiations European Council Soft deadline for negotiations September 9 Swedish General Elections Soft deadline for negotiations Ratifications in Parliament Ratifications in Parliament October Expected European Council December Expected European Council 2019 Spring March 25/04/17 29 Article 50 period ends SNP target for Scottish independence referendum Article 50 period ends

14 We think that we will see Tories emerge with a majority of seats, up from the current level of 17. Sterling will initially rise as long as the majority is above 50 anything less and we think GBP will slide. A hung parliament would prompt a 2-4% decline as we saw back in 2010 but amplified by Brexit concerns. We remain net negative sterling against the euro but see gains against the USD. Brexit remains the crucial issue for the UK economy and any government will have to likely increase spending to deal with holes in budgets from lower tax revenue. This will be to prevent the political fall out of a recession in the midst of the negotiations.

15 Questions

Disclaimers These comments are the views and opinions of the author and should not be construed as advice. You should act using your own information and judgment.

16 Disclaimers These comments are the views and opinions of the author and should not be construed as advice. You should act using your own information and judgment. Whilst information has been obtained from and is based upon multiple sources the author believes to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute the author s own judgment as of the date of the briefing and are subject to change without notice. Any rates given are interbank i.e. for amounts of 5million or more thus are not indicative of the rates offered by World First. World First UK is registered in England and Wales as a Limited Company: No and is authorised by the Financial Conduct Authority, FRN:900508, under the Electronic Money Regulations 2011 for the issuing of electronic money. World First USA, Inc. is a Delaware corporation, registered as a Money Services Business in the United States with FinCEN, and holds licensing as a non-depository financial institution with the Nationwide Multistate Licensing System (NMLS# ). World First USA, Inc. is also registered in Canada with FINTRAC (registration number M ). Contact us: World First USA, Inc. 211 E 7th Street, Austin, TX 78701

Research UK Hung parliament adds government risk premium to GBP

Research UK Hung parliament adds government risk premium to GBP Investment Research General Market Conditions 09 June 2017 Hung parliament adds government risk premium to GBP Hung parliament but the Conservative Party seems likely to form a minority government backed