The British Pound: Just Keep Away say CIBC, BMO and UBS

© Pavel Ignatov, Adobe Stock

- GBP best avoided for now say CIBC, BMO, UBS.

- As all Brexit options are still on table, outlook is uncertain.

- PM May's deal passing leads GBPUSD to just 1.35 says BMO. 

The Pound was treading water against the Dollar Friday after managing to cling to much of its recent gain during the overnight session but investors are best served by steering well clear of the British currency for the time being, according to three influential investment banks. 

CIBC Capital Markets, UBS Group and BMO Capital Markets told clients on Friday to avoid betting on the Pound. All are influential voices in their own right but their insight and advice is made more pertinent by the fact that all three of them are overseas firms.

That means they may have been left further adrift by the ongoing shenanigans in parliament than even the electorate, which is important because the sentiments of those firms are able to influence the trajectory of Pound Sterling. 

Britons are currently advancing across the pages of history wearing a blindfold, given the pandemonium that has played out during recent years and particularly in the last week. Those events are now begging the question of whether the UK will ever even leave the European Union at all. 

That is the scale of the uncertainty the domestic population faces. But for Sterling the eventual answer to the above question will have binary implications in that remaining within the EU could easily put the Pound-to-Dollar rate back at 1.40 or higher, while a so-called no deal exit may drive it to 1.20 or lower.

This means there is a huge 15% range between the two extremes that, when applied to a revenue or profit stream, could be the difference between life and death for some companies that trade internationally. Easy to see, then, is the reason why the three banks are taking something like a "hedge, then keep away" approach toward Sterling.

"The Brexit process remains extremely fluid, and until some clarity emerges we do not advocate taking directional views in sterling and advise hedging downside risks," says Daniel Trum, from the chief investment office of UBS. 

The House of Commons including Prime Minister Theresa May voted on Thursday to have her return to Brussels and request from the European Union an extension of the Article 50 negotiating window, which is currently scheduled to end on March 29. 

PM May has said that if parliament approves her EU Withdrawal Agreement then she will ask the EU for only a short two-month delay to enable ratification but that, if parliament rejects her proposal for a third time, then there could be a Brexit delay of between two and four years. 

"Ultimately we expect a Withdrawal Agreement to be approved at some point, but the already drawnout process may have many more months to run before we get there. We remain alert to the fact that in this extremely fluid situation, all options still remain on the table," says Trum. 

All 27 leaders of EU members must unanimously approve any extension and there's no guarantee that they'll do it. There's also little telling what they might demand in return for granting an extension or exactly how long they could demand that such a thing be. 

Unless and until an extension is agreed the course of action currently enshrined in law will see the UK leave the EU on March 29 and default to doing business with it on World Trade Organization terms, which is for those looking to see a stronger Pound Sterling, the worst possible outcome.

"If the EU elects not to extend the deadline for various reasons, that’s GBP bearish – full stop, though we don’t see that as likely at this point," says Bipan Rai, a macro strategist at CIBC Capital Markets. "Risk-reward in the {GBPUSD} pair is downright ugly and we prefer not to get involved here. The daily charts show higher lows which supports the bias to buy on dips below the 1.3200 level. That bias is gone if price action moves below the 1.3000 handle."

Above: Pound-to-Dollar rate shown at hourly intervals. Captures this week's price action.

Markets like PM May's Brexit proposal because it defers a meaningful change in circumstance until at least the end of 2020 and even then, the exit envisaged by the withdrawal agreement and future relationship declaration removes the UK from the under the EU's wing in legal terms, but little more than that. 

This is because the withdrawal agreement means that if the UK cannot or will not satisfy the EU's demands in the next stage of the negotiations, government will be forced to choose between two unpalatable options.

That choice is between allowing the province of Northern Ireland to be annexed by the Republic of Ireland and European Union, or the UK remaining subordinate to the EU and subject to many of its laws on a potentially-indefinite basis and without any ability to influence those laws or institutions.

As a result, the proposal that PM May has been doggedly thrusting at parliament has gone down like a cup of cold sick with some MPs, although not nearly all of them. Many have appeared to oppose the pact simply out of a partisan and opportunistic desire to force a general election. 

"We see an increasing risk of an Article-50 extension leading to snap elections in the UK, and the politics of an Article-50 extension will probably be more vicious than the politics of “no deal”," says Stephen Gallo, European head of FX strategy at BMO Capital Markets. "We feel there is already a sizeable degree of optimism baked into GBPUSD spot."

Above: Pound-to-Dollar rate shown at weekly intervals.

Gallo says the Pound-to-Dollar rate is trading in a way that suggests the market does not have enough conviction to offer it lower or bid it higher from current levels just yet. But he also says BMO has a "decidedly downbeat" view of Europe's major currencies relative to the U.S. Dollar even before it takes the Brexit saga into account.

His forecast has been for some weeks now that a "no deal Brexit by accident" will happen either this month or at the other end of a short extension. Friday he cut the subjective probability of that happening from 53% to 45%, and reiterated his forecast for a 1.20 Pound-to-Dollar rate upon that event. 

Gallo says there is only a 15% probability of the EU Withdrawal Agreement being passed by parliament and that, if it does pass, the Pound-to-Dollar rate will hit only 1.35.

The other scenario, with a 45% probability, also sees the Pound-to-Dollar rate rise to only 1.35 but it means a general election and potentially "multiple Article 50 extensions". 

"In spite of the GBP’s recently firm tone and the passage of at least two motions directing the government not to exit the EU without a deal in place, we are still inclined to declare “no deal” Brexit as the “right call”. In a sense, we’re doing a “victory lap” on that one. But in the broad spectrum of EU politics, it seems that yet another avenue to “kick the can down” umpteen times may have been found," Gallo writes, to clients, Friday. 

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