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
    philipwee@dbs.com

     

    Chang Wei Liang

    Credit & FX Strategist
    weiliangchang@dbs.com

    The information herein is published by DBS Bank Ltd and PT Bank DBS Indonesia (collectively, the “DBS Group”). It is based on information obtained from sources believed to be reliable, but the Group does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation & the particular needs of any specific addressee. The information herein is published for the information of addressees only & is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Group, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Group or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Group & its associates, their directors, officers and/or employees may have positions or other interests in, & may effect transactions in securities mentioned herein & may also perform or seek to perform broking, investment banking & other banking or finan­cial services for these companies. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Sources for all charts & tables are CEIC & Bloomberg unless otherwise specified.

    DBS Bank Ltd., 12 Marina Blvd, Marina Bay Financial Center Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E.

    PT Bank DBS Indonesia, DBS Bank Tower, 33rd floor, Ciputra World 1, Jalan Prof. Dr. Satrio Kav 3-5, Jakarta, 12940, Indonesia. Tel: 62-21-2988-4000. Company Registration No. 09.03.1.64.96422.