Morning Commentary: Brexit Horse Trading

Foreign Exchange - Morning Commentary
Brexit Horse Trading
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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
While Asia reacted negatively to the weaker-than-expected Chinese GDP data (see below), markets and investors are generally on the sidelines today as they await a very important vote in the U.K. Parliament regarding Brexit. PM Boris Johnson has done what many within his own party and in the opposition said could not be done – a negotiated Brexit deal with the EU. Now he must do the horse trading within his own party and with the opposition to find the necessary votes for tomorrow to ensure the U.K. leaves before the October 31 deadline.

The last time Parliament voted on a Saturday was 37 years ago which in itself tells you the importance of this vote. While the Labor Party leaders have said they will vote against the deal, there is no guarantee that their members will follow suit. Many constituents within the Labor Party voted for Brexit in 2016 and will hold their members accountable for a vote that goes against their interests. While many members of Parliament have not yet declared their vote, horse trading and pressure will be building as the vote nears tomorrow afternoon.

One interesting sidebar to this vote is what the U.K. bookies are saying. Last night, the bookies priced the “yes” vote probability at 50/50. That now sits at 52/48 in favor of a “yes” vote. Bookies are betting that there will be enough defections from Labor and other parties to get the necessary votes.

The British pound (GBP) is consolidating its most recent gains and is near the highs seen yesterday. Reading the morning analysis of the upcoming vote tomorrow, a “no” vote that loses by a narrow margin will see a slightly weaker GBP on Sunday night as markets anticipate an eventual conclusion to Brexit.  But a “yes” vote is seen as catapulting the GBP above $1.3000 or higher.

While I know little of how U.K. politics operate, I do know and understand how the U.S. Congress operates. There are times when our representatives must do what is right for the country and forego local politics and party affiliations. After nearly 3 ½ years since the Brexit vote, it is time to respect the wishes of the people. Critics have underestimated PM Boris Johnson; I think he will find the necessary votes tomorrow. If I was betting, I would be betting on a “yes” vote tomorrow.
  • Chinese Q3 growth posted its slowest rate of growth since 1992 at 6.0%. Q2 came in at 6.2% and Q1 growth was 6.4%. For all of 2018, GDP growth averaged 6.6%. While it is clear the trade war and the use of tariffs is hurting Chinese growth and exports, the Chinese economy has become more diversified and is avoiding a direct hit like so many EZ countries. While China is more dependent on exports than the U.S. at nearly 20% of GDP, personal consumption is not far behind the U.S. percentage at nearly 61% and has helped keep the economy moving forward. Asian equities reacted negatively to the news, but the CNY is unchanged.
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