Brexit brinksmanship derails GBP rally; IDR positive

GBP derailed by Brexit brinksmanship. IDR supported by political positivity.
Philip Wee, Wei Liang Chang23 Oct 2019
    Photo credit: AFP Photo

    FX: GBP rally derailed by political brinksmanship over Brexit

    The British pound fell from the session’s high of 1.30 to 1.2860 vs USD this morning. Sterling could not hold on to its gains after the UK House of Commons voted 329-299 in favour of Prime Minister Boris Johnson’s withdrawal agreement with the EU. MPs, however, immediately rejected by 322 votes to 308 Mr Johnson’s timetable motion for the bill which has drastically lowered the odds for the UK to exit with a deal on October 31. This has increased speculation that UK lawmakers would push for early elections but this requires a two-thirds majority (at least 434 votes) in the Commons.

    Apart from this, EU still needs to approve UK’s request (which Mr Johnson delivered in an unsigned letter) for a Brexit extension to January 31, 2020. Unless Mr Johnson pushes through the Brexit deal legislation, an election and an extension are still needed to avert a default no-deal Brexit on Halloween. The risk of kicking the (no-deal Brexit) can down into 2020 should not be underestimated either. Even if elections are held, polls still see a hung parliament with no political party securing a majority. In this regard, the prolonged uncertainty that has taken a toll on business confidence and investment, not only in the UK but also the EU, is likely to persist. Look for the pound to unwind more of its recent gains.

    IDR supported by political positivity

    The sentiment for the Indonesian rupiah was lifted by news of Indrawati’s reappointment as Finance Minister in President Jokowi’s new Cabinet; USD/IDR eased towards 14000. Her solid credibility reinforces investor confidence in the country’s fiscal policy stance, while her deep policy experience also brightens the prospects of tax reforms. President Jokowi has previously proposed lowering the corporate tax rate to 20% from 25%, and Indrawati is a capable Minister who can plan balanced changes to fiscal policy. Certainly, there is sizeable scope for tax reforms, with OECD statistics showing Indonesia to have the lowest tax-to-GDP ratio in Asia Pacific. Expected appointments of both technocrats and business leaders in the new Cabinet, including Go-Jek CEO Makarim, also portends well for business reforms, which could be a catalyst for inflows.

    Philip Wee

    FX Strategist - G3 & Asia


    Chang Wei Liang

    Credit & FX Strategist

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