GBP pressure; Capital market access issue between China-US

Brexit and BOE weighing on GBP. US mulls restricting China’s capital market access.
Philip Wee, Eugene Leow30 Sep 2019
    Photo credit: AFP Photo

    Latest on the Brexit saga and GBP outlook

    The British pound did not appreciate on news that the opposition parties may be looking at a no-confidence vote to topple Prime Minister Boris Johnson. In doing so, the opposition has acknowledged that the Benn Act to prevent a no-deal Brexit may not be as tight as it hoped. A no-confidence vote could also play into Mr Johnson’s hand. If the vote passes and an alternative government cannot be formed in 14 days, a general election would be automatically triggered to take place after October 31. By default, a no-confidence vote could result in the UK exiting the EU without a deal.
    None of the key players – the Scottish National Party, the Liberal Democrats and expelled Tory rebels – support Labour Party leader Jeremy Corbyn as the caretaker Prime Minister. With MPs in disarray, UK businesses have become resigned to Brexit uncertainties persisting into 2020. Against this background, Bank of England has leaned towards easing monetary policy even if a no-deal Brexit was avoided on October 31. As things stand, time is running out for the UK to avoid a disorderly Brexit or escape political paralysis. Hence, the pound is better off following the gilt yield lower. Our view remains for the GBPUSD to break below 1.20.
    Rates: Capital market access yet another chapter in China-US friction 
    News that the US is considering ways to restrict capital flows into China dented sentiment late last week. Over the weekend, however, the US treasury issued a statement asserting that this was not the case “at this time.” A move from trade war to capital market war would mark yet another unhelpful chapter  in China-US tensions. On the Chinese side, in fact, recent moves have been toward further liberalisation, with the USD300bn cap on foreign funds investing in stocks and bonds being removed in September. Morover, since Chinese stocks have several alternative listing options, ranging from London to Hong Kong to the ever burgeoning on-shore market, losing access to the US would be negative but not devastating.

    Philip Wee

    FX Strategist - G3 & Asia

    Eugene Leow

    Rates Strategist - G3 & Asia

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