Tag Archives: Brexit

Brexit Bill Increased

Discussion and Analysis by Grace Gliksten
 

It has been reported that Prime Minister Theresa May won ministerial support to increase the Brexit offer from €20bn to €40bn yesterday. May is hoping that the increase will unlock stalled negotiations, but has been warned by Eurosceptic colleagues that this is conditional upon securing good transition and trade agreements with the EU. The increase is intended to close the gap between the UK’s initial offer of €20bn and the €60bn expected by the EU.
 
Ministers have speculated that the promise from the UK to respect its outstanding EU commitments could mean a bill of €40bn to €50bn. While the UK accepts some obligations, there are several questions surrounding the full details of these. These include the issue of pensions for EU staff, and how the UK’s contribution is calculated. Another contentious issue surrounds the question of building projects that have had funding approved by all EU states, but where work will not start until the Article 50 process has been completed.
 
The increase was approved by a 10-member subcommittee in Downing Street yesterday. One minister said, “there is consensus behind the prime minister’s position – for now.” Foreign Secretary, Boris Johnson, was part of the subcommittee and one of the members who agreed that the increased offer should be dependent upon the EU opening transition talks in December and settling on an encouraging trade agreement next year. Another member who agreed with Johnson said, “it has to be something for something … this can’t be unconditional money.” Eurosceptic ministers have also said, however, that Britain should be prepared to walk out of talks if a bad trade deal is proposed by the EU. This follows the same tone as May who said, “nothing is agreed until everything is agreed”.
May is expected to wait until the last possible moment before making her improved financial offer. She has confirmed that the offer will only be made when she is sure that it will break the stalemate in negotiations ahead of the EU summit next month. 8th December has been signalled by officials as the date the offer will be made, despite Michel Barnier’s, the EU chief negotiator, pressure to deliver the proposal by the end of this week.
 
May is holding off on the offer in order to gain the most leverage in negotiations.. May is waiting for assurances from EU leaders that the proposal would be received favourably and wants the European Council to declare that first round talks have made “sufficient progress”. She wants the increased offer to help open talks on the transition deal and trade agreements.
Negotiations have been complicated by the current political uncertainty in Germany. The breakdown of talks to form a coalition under Chancellor, Angela Merkel, has left Germany in an unprecedented political crisis. With both the coalition and Merkel’s position unclear, May has been encouraged to exploit the current weakness. However, Thomas Matussek, former German ambassador to the UK, said, “I think German instability is bad news for Britain.” Moderating these comments, he added that he believes that the problems in Berlin would make “no operational difference” to the EU’s position on Brexit.
 
The Pound has benefited from positive Brexit news, improving across the board since the decision. Against the Euro, German political instability has exacerbated Sterling’s strength. The Pound rose 0.69 percent against the Euro, moving from 1.1230 to 1.1305, still short of the gains made at the end of October. It also increased 0.59 percent against the US Dollar, from 1.3175 to 1.3264.
 
 

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Brexit under May

 

Discussion and Analysis by Charles Porter:

 

The original Brexit vote was motivated by a dissensus within the incumbent Conservative government under David Cameron; at least that is the public and academic consensus. I argue that this suggests that the delivery of a final secession, and the eventual form that Brexit takes, will be definitive and complete. Whilst the media and critics may fear and criticise Theresa May’s commitment to a soft or incomplete Brexit, even her conjectured ambivalence about reversing the process entirely, the composition of the Conservative party is likely to force her hand to abide by the will of the Leave vote.

 

The market’s short-medium run consensus is bearish for the Pound, my view also remains this way. However, this article aims to uncover why this trend and expectations for its continuance might be over exercised and the bearish market over anticipated. Whether the desire for the United Kingdom to exit the European Union has been evolving and suppressed within the British public ever since 1973 is inconsequential. What matters is that the Brexit mandate is the democratic consequence of the June 2016 referendum; an event that was facilitated at this specific time by the internal dynamics of the incumbent Conservative government.

 

David Cameron’s Conservative party was staunchly divided on Brexit. This was not a new tension, or, for that matter, even one that has disappeared following Cameron’s resignation. Conservative MPs are almost equally divided on the matter of Europe. Whilst this numerically resembles the referendum divide, a geographical, voting result, and demographic analysis reveals that parliamentary representation does not correlate with public voting behaviour. Critically, therefore, the Conservative party is constrained.

 

To unite his party during the 2015 election campaign, Cameron included the pledge within the Conservative manifesto. There were additional reasons for this inclusion. For example, the wider conservative party feared a defection of voters and MPs alike to the United Kingdom Independence Party; UKIP. Therefore, in an appeal to the median voter and to develop the voter base during the referendum, the party offered a referendum, despite formally voting to remain. However, internal party dynamics were overwhelmingly responsible for the referendum opportunity, with a breakup of the party and defection possible had Cameron not conceded to a referendum. Critically, I argue that this division within the Conservative party will, once again, safeguard the deliverance of secession. This is because without a significant reshuffle of Conservative representatives, Members will assert pressure upon the leadership and cabinet to deliver.

 

This offers a critical market insight: despite public and media fears of a Brexit U-turn, so long as the Conservative party is the predominant government, a Brexit is almost a foregone conclusion. Therefore, upon the realisation of this conclusion, the uncertainty and risk that is priced within the foreign exchange market surrounding the secession negotiations and final exit arrangement could be alleviated. Uncertain effects surrounding the British political economy deteriorate the value and purchasing parity of the Pound Sterling. A potential for a partial revaluation, ceteris paribus, once this fact establishes itself is a strong possibility.

 

Ultimately, therefore, the Pound could be valued slightly higher than its respective intraday level by pricing out the uncertainty risk of a retrenchment from Brexit and a deliberate bad deal. As mentioned above, this does not reverse expectations of a bearish Pound Sterling. The absolute risk surrounding Brexit and the final exit deal still remains. Instead, what is overpriced, is the risk of a no B-Remain, a U-turn and the political and social fallout from this event.

 

This leads to the conclusion that despite rightful concern about Brexit negotiation progress and UK party politics, the constraint upon the government to execute a satisfactory and decoupled Brexit is stronger than one might realise at first glance. Following the devaluation of the Pound at market upon this morning, when Sterling lost more than half a percent against the Dollar and Euro, this message is increasingly salient.

 

While there are qualifications to this, not least the unstable absolute mandate of this Conservative government thereby raising the efficacy of defections, the Parliamentary and whip system can be supposed to offer some constraint upon Commons voting behaviour amongst Remain-inclined Members. Therefore, the only real threat to the foregone conclusion of a Brexit is a second referendum; a measure that the composition of the incumbent party should, once again, preclude. Members of the party would be constrained to follow their public mandate, however, have considerable power over whether to allow that mandate to manifest by blocking a referendum bill in the Commons.

 

In summary, regardless of your opinion on Brexit; good bad, beautiful or ugly, the UK’s secession from the European Union is almost inevitable. Outstanding circumstances outside the realm of normal governmental action and party politics would have to prevail with remarkable secrecy. The argumentation behind this conclusion further suggests that risk within the Pound Sterling, specific to Brexit, is overvalued. Therefore, the Pound Sterling may appreciate upon the realisation of the government’s real, de facto, commitment to leaving the Union. The Conservative party conference, that concluded yesterday, developed even more weight to this argument; Brexit is the only plausible option within the UK’s incumbent centre-right party.

 

SGM-FX buildings

Angela Win; Anglo Win?

 

Our Foreign Exchange Specialist, Charles Porter, speaks with London School of Economics Associate Professor, Dr. Waltraud Schelkle. Regarding Brexit, we discuss how the passing of the German election may accelerate progress within negotiations as well as the possibility, acceptability and likelihood of a Second EU referendum within the UK. 

 

Understanding the Brexit process, including the rate of progress and the final outcome, is critical when attempting not to get caught out by foreign exchange markets. Our analysis and opinion allows you to make informed decisions and exploit currency market fluctuations to find the best, unique, solution for you.

 

In this pursuit, below we have transcribed out interview with Dr. Schelkle from the video, also available on youtube. To convert this analysis of the current Brexit process into a tangible, effective and innovative foreign exchange saving, speak with our specialist and follow our analysis.

 

 

 

 

Charles Porter, Foreign Exchange Specialist, SGM-FX:

 

Today SGM joins Dr Waltraud Schlekle, who is Associate Professor of Political Economy here at the London School of Economics. Waltraud has been reading political economy for over eighteen years and it is an honour that she joins us here today.

 

So as we talk about going down either of these paths, the hypothetical deregulation or conformity outside of the European Union, yet still operating within the Single market; wherever we end up, do you think that the passing of the German election might actually facilitate some progress on the Brexit referendum; the secession process?

 

Dr. Waltraud Schelkle, Associate Professor, London School of Economics:

 

No. I happen to think, and what I hear in Germany is, that is, Merkel was briefly trying to be helpful when she saw, and I am afraid people like Boris Johnson do not help you very much. In this, they cannot be trusted, they are unknowing, the government does not know itself what it wants, then Merkel has made up her mind. I think her priority is getting the European Union in better shape. And for that, Britain at the moment is not at all helpful. Only Theresa May, and Theresa May in a strong position; that would be another matter. But the way it has gone, I think we just wait and see and unfortunately the clock is ticking for us who live here, in Britain.

 

Charles Porter, Foreign Exchange Specialist, SGM-FX:

 

Of course, so in terms of the European Council’s role: until the end, it might not be that significant. At the moment, it is between Michel Barnier and David Davis in order to start these negotiations. Do you think there is almost an impasse within European institutions that’s blocking Brexit progress at the moment? That’s the reason that I think, maybe, the passion of the German elections will free up European institutions to talk about Brexit.

 

Dr. Waltraud Schelkle, Associate Professor, London School of Economics:

 

No, I really don’t think that Germany is blocking anything in particular. I don’t even think there is an impasse, because the Europeans have given clear guidelines to Barnier, it’s very comfortable for him to say, ‘well I am just sticking to my brief’. While Britain has not come up with anything clear and the strategy you could negotiate about and you would see where, then, that the problems lie on the side of the Europeans; I am afraid we are not even there yet to see that!

 

And this means it’s a completely fantasy world to think that you can do that in the next year or so. I discuss it with my colleagues and they do not agree with me; I would think that we just wade into the next election and then we can have an election campaign, as it should be in a democracy, whether people are still warming to this after the first referendum; whether they still want Brexit. To me, that would be the proper way to do it. But my colleagues say they do not think that it will last that long and it’s half because they will wrap it up one way or another before the election campaign and labour will go with it.

 

Charles Porter, Foreign Exchange Specialist, SGM-FX:

 

So to some extent, perhaps, in your view, maybe not your colleague’s, Vince Cable’s Liberal Democrat Party, and their line “having a second referendum once we know more”; that’s not anti-democratic to you? It’s not trying to railroad the first referendum?

 

Dr. Waltraud Schelkle, Associate Professor, London School of Economics:

 

No, actually that’s quite a normal scenario. If you look at the history of referenda, a friend of mine has done this; it’s quite often that you a second referendum. Now, I do understand why the British did not announce that from the start: I mean, if you had said to them, oh, yeah, we’ll have a second referendum! I mean, then the European’s have no reason to compromise on anything, right? Just let a hard Brexit be there as a threat and then people may back off. So I do understand this, but, at the same time, it is democratically the proper procedure.

 

This is what New Zealand recently did with its flag and then decided, in the end, for the status quo. That may happen because it is true, and it is a solid argument to say, yes, people voted for Brexit – yes or no – and the majority said yes; so now we try! But whether there was ever a majority for any of the options you have available after Brexit; that is not clear to me.

 

 

EU banner

German Elections and Brexit

Our Foreign Exchange Specialist, Charles Porter, speaks with London School of Economics Associate Professor, Dr. Waltraud Schelkle. Regarding Brexit, we discuss how the passing of the German election may accelerate progress within negotiations as well as the possibility, acceptability and likelihood of a Second EU referendum within the UK. 

 

 

 

 

 

 

 

 

 

Understanding the Brexit process, including the rate of progress and the final outcome, is critical when attempting not to get caught out by foreign exchange markets. Our analysis and opinion allows you to make informed decisions and exploit currency market fluctuations to find the best, unique, solution for you.

 

 

Germany’s General Election

Discussion and Analysis by Charles Porter:

Germany will head to the polls on Sunday (24th September). The salience of this election to the Eurozone political economy cannot be understated. This article will guide readers through the consequences of a significant European election given the continent’s underlying social, political and economic currents.

 

There are numerous and healthy literatures regarding national elections within political, economic and monetary unions. Perhaps the most interesting of which, and the one utilised within this article, is the informal governance aspect of the European Union (EU). This avenue highlights the importance of non-formal rules alongside Members’ obligations and control within the Union.

 

Given that the Brexit negotiation process has had a less than auspicious dawn, the future Chancellor of Germany alongside the new Bundestag composition, will play a critical role in shaping the departure of the United Kingdom from the EU. Given that insignificant formal progress has been made, future heads of states, not incumbents, will determine the secession agreement. As the winner and composition of government becomes apparent, it will be immensely important to understand how the head of state and supporting government will conduct their affairs within the European Council.

 

A lot is at stake, therefore, for nations other than Germany at their domestic election. The risk, ultimately, will be measured in least-worst terms. Given that the German electoral backdrop and Brexit decision is persistently framed as a negotiation, even a zero-sum game, there is no prospective leader that will offer a free ride, full of concessions, to the UK when leaving the EU. However, some may not push the UK as a far as others in terms of post-secession contributions and trade prospects.

 

However, there is one more certain bonus coming the UK’s way following Germany’s general election. The good news for the UK should arrive despite the result and development of the Chancellorship. This phenomenon is availed by the informal governance literature. Two findings suggest that the national pay-out from the EU budget during the year of a national election is 10 percent higher than normal in favour of the economy experiencing an election. More importantly, the period surrounding a salient national election is also marked by regulatory and conversational stagnation.

 

These findings in conjunction with each other suggest that once the German election is out of the way, there should be less confusion within the European polity and EU institutions. This could facilitate progress with the Brexit process. Notably, the French presidential election also fell within the post-Article 50-declaration period. Therefore, perhaps the deadlock within negotiations will subside and mutually prosperous coalition building and concession granting will prevail.

 

Comments have abounded that the foreign exchange channel has almost exclusively tracked and responded to the political volatility induced by the Brexit process. This is an interesting conclusion given the enabling characteristic of currencies. Nevertheless, given the apparent exposure of foreign exchange markets to Brexit-related turmoil, good attention should be paid to the forthcoming German election at a time where the British Prime Minister sets forth her vision for the UK.

 

 

UK buildings

The UK amongst the World

Discussion and Analysis by Charles Porter:

 

This week will challenge the strength of the Great British Pound and thereby generate considerable upside and downside risks. However, the materialisation of UK performance may be subsumed within broader, global, currency trends.

 

Saying a prayer this weekend was perhaps the most useful form of global speculation. Following North Korea’s nuclear test on Sunday 3rd September, Seoul, the capital of South Korea, frightened global markets with admonitions of further missile preparation. Whilst tension was building in the Peninsula, a tropical depression was maturing within the Atlantic Ocean, generating damage expectations in the order of hundreds of billions of US Dollars. Therefore, a risk-off strategy spurred the value of traditional safe-haven assets whilst eroding the worth of dominant currencies. With two climactic exogenous events, one geopolitical and the other natural, there was very little consensus on how markets would open this morning.

 

In contrast, this week, especially with respect to the pound sterling may be more transparent and discernible. For example, today will see a salient vote within the House of Commons take place. This vote is on the second reading of the European Union (Withdrawal) Bill; the Repeal Bill. The Pound will be sensitive to the success and fluidity with which the Bill passes through Parliament due to its importance. By repealing the 1972 European Communities Act, the act through which the United Kingdom acceded to the EU, its Repeal will forecast the path forward for the UK, post secession.

 

Any evidence of considerable headwind, from Conservative/DUP rebellions, filibustering attempts, or abstentions, will introduce a degree of uncertainty within the UK market and the currency. In the absence of headwinds or market-sensitive reforms to the Bill, the GB Pound should encounter an appreciative tailwind while the currency yearns for any solid, tangible confidence in the Brexit process.

 

The Monetary Policy Committee of the Bank of England will also announce their latest decision and interest rate target on Thursday. The previous Decision saw a 6-to-2 division within the Committee in favour of keeping the base rate fixed at 0.25%. However, markets had anticipated a more divisive vote with a greater impetus in favour of a rate hike in line with the votes of Michael Saunders and Ian McCafferty. In fact, the 3-1 ratio saw a considerable depreciation of the Pound as markets had priced in a more optimistic recovery and macroeconomic impression than the Bank. A graph depicting the devaluation is presented at the end of this article.

 

With numerous central bankers over the past few weeks, from Europe to Canada, attesting to the resilience and bite of the global economic recovery, we wait to see whether the Bank shares this perception despite Brexit uncertainty. Whilst the vote of Michael Saunders in particular seems certain and in favour of a hike, forecasting other members’ decisions is less straightforward.

 

The clarity of the rate decision will improve during the run up to Thursday. Given that the Bank’s mandate, delivered by the Chancellor of the Exchequer, revolves around a 2% inflation target, tomorrow’s Consumer Price Index inflation indicator will frame and even forebode the Decision. Moreover, Wednesday will see statistics released relating to the health and performance of the UK labour market. Whilst a rate hike should not be expected, a more Hawkish tone regarding monetary policy and vocal condemnation of Pound’s weakness could see a credible, confidence and expectation-based appreciation of the Pound sterling.

 

A considerable amount of the upside risk will already be priced into the currency and assets denominated therein. Therefore, a failure to meet these expectations will result in the converse effect; a depreciation of the currency as accelerating, above-mandate, inflation is not curtailed. This week’s events therefore deliver a considerable propensity for a re-evaluation of the UK political economy. Despite this importance, global geopolitical uncertainty, in our opinion, still contains the propensity to divert attention away from developed markets, threatening to insulate global currencies from idiosyncratic national events.

 

 

August 3rd 2017: Previous Bank of England Monetary Policy Decision. The Graph above shows an intraday currency fluctuation in excess of 1 percent. The devaluation of the GBP vis-à-vis the Euro is the market response to a Dovish and relatively undivided Monetary Policy Decision. The devaluation is therefore precipitated by the downward revision of future monetary policy expectations and an internalisation of the Bank’s apparent low confidence in the global economy and the possibility for future interest rate normalisation.