Pound recovers after MPs secure right to table to bills blocking no-deal Brexit
The trade cost of a no-deal Brexit to the UK could be more than $16bn according to UNCTAD
The British pound rebounded early Wednesday morning after the government suffered a parliamentary defeat late on Tuesday night when lawmakers grabbed control of the agenda to bring forward a bill to block a no-deal Brexit by October 31.
The pound dropped as low as $1.1959 on Tuesday but moved back above $1.21 in early trading on Wednesday morning after 21 MPs defied government threats to remove them from the party to allow a bill to be brought forward to block a no-deal Brexit by October 31 and seek a further possible extension from the European Union. The last time the pound traded below the $1.20 mark was in 1985 and a brief flash crash in October 2016.
"[Prime Minister Boris] Johnson’s defeat gave a breather to the pound markets, although the game is not over yet for the GBP bears. Boris Johnson could announce a snap election by October 14 to seek support from British voters to get Brexit done, with or without a deal," said Ipek Ozkardeskaya, a senior markets analyst at London Capital Group.
Ms Ozkardeskaya, said a snap election would be "a risky bet for Boris Johnson".
"If he loses, he will be the shortest serving PM in the country’s history, and more importantly, the Labour Party would opt for a second Brexit referendum to make sure this is what Brits really, really want."
Stephane Monier, the chief investment officer of Swiss private bank Lombard Odier said the pound currently "looks quite undervalued" from a fundamental perspective, but this could change if the UK were to look like it would crash out of the EU without a deal.
"Nevertheless, the current chaos and uncertainty over Brexit is certainly weighing on sterling. In our central scenario of an averted no-deal Brexit, GBP would strengthen meaningfully," against other major currencies, he said.
"In the risk scenario of a no-deal Brexit, we would expect GBPUSD to fall to 1.10 and below, while GBPEUR may approach parity."
Although the short-term impact of a no-deal Brexit could be relatively benign, leaving without a deal would prove costly in the long term, a new paper by the UK in a Changing Europe and the London School of Economics' Centre for Economic Performance argues. Downgrades by credit agencies of the UK's sovereign debt would be immediate and thus push up the cost of borrowing, but leaving the EU on World Trade Organisation (WTO) terms would reduce the UK's income per capita by between 3.5 per cent and 8.7 per cent over a 10-year period.
Leaving on terms similar to those negotiated by former prime minister Theresa May would lead to income per capita falling by between 1.9 per cent and 5.5 per cent.
"In both cases, UK households would be substantially worse off than if the UK were to remain in the EU, but leaving with a deal cuts the economic costs of Brexit almost in half," the report said.
About 20 per cent of UK non-EU exports are at risk of facing higher tariffs from countries such as Turkey, South Africa, Canada and Mexico, according to research by the United Nations Conference on Trade and Development (UNCTAD).
"In the event of a no-deal Brexit, and in the absence of replacement agreements (rollover deals), the UK would abruptly lose preferential access to these markets and, by default, would have to export under World Trade Organisation Most Favoured Nation (MFN) tariffs," UNCTAD said.
Although the UK has rolled over a number of agreements, negotiations for others are still ongoing and if not concluded before an exit from the EU, which is the UK's largest trading partner, Brexit could cost the UK billions in export earnings in key markets.
"Our calculations indicate that a loss of preferences in the EU market consequent to a no-deal Brexit will result in UK export losses of at least $16 billion (representing a loss of approximately 7 per cent of overall UK exports to the EU)," UNCTAD said. "This is a conservative estimate ... in reality, the losses would be much greater because of non-tariff measures, border controls and disruption of existing UK-EU production networks."
Updated: September 4, 2019 11:23 AM