Morning Commentary: Mayday in June

Foreign Exchange - Morning Commentary

Mayday in June

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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
After much speculation, PM May has officially announced that she will stand down as the leader of her party on June 7.  Focus now shifts to the leadership contest that will formally start the following week. 
The leadership contest process starts with Graham Brady, the Chairman of the Committee that represents the rank and file members of the Tory party in Parliament, consulting with the party board to establish a timeline.  Theoretically, any MP that has the support of two other MPs can be nominated.  A series of secret ballots are held, with the least popular candidate knocked out after each round.  After establishing the final two candidates, campaigning is done and ultimately a new leader is chosen.  Generally, this process takes about six weeks and May will stay on until a successor has been announced.   
In reality, potential successors have already begun jostling for the position with former Foreign Secretary Boris Johnson the early favorite to take over.  If Boris Johnson doesn’t take over, then it is likely that it will be another hard-Brexit candidate as 86% of the Tory party sees leaving the EU as the most important issue facing the country. The performance of the Brexit Party in the EU parliamentary is likely to inform the path for Brexit as a strong performance should reduce the chances of revoking Article 50.
With PM May stepping down, all the options—from leaving with no deal to cancelling Brexit altogether—are on the table.  Over the past three weeks, the pound has been steadily moving lower as the markets began pricing in the possibility that a leadership change will usher in a new leader willing to take a tougher stance.  To this point, Boris Johnson has already announced that the UK must prepare for a no deal exit.  However, if a majority of parliament remains against this option, a second referendum or a new election might be needed to break the deadlock.  Ultimately, the situation remains very fluid. 
  • US durable goods orders disappointed, coming in at -2.1% against expectations for a drop of 2.0%.  This comes on the back of yesterday’s PMI release that also disappointed, with both services and manufacturing PMIs missing expectations, coming in at a three year low.   
  • The US has proposed allowing US-based companies to seek anti-subsidy tariffs on products from countries found by the US Treasury Department to be engaging in competitive devaluation of their currencies.  Currently, no country in the world meets this criteria.  This move would be a departure from past US tariff policy and opens up another avenue for the US to impose tariffs. 
  • Oil price dropped sharply yesterday, falling by nearly 6%, on fears that a prolonged trade war will dent oil demand. 
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