Daily Management Review

Strategist says if Britain Resorts to WTO Trade Rules Post-Brexit, Sterling Could Face Binary Implications


Strategist says if Britain Resorts to WTO Trade Rules Post-Brexit, Sterling Could Face Binary Implications
A strategist at BofA Merrill Lynch is of the view that the complete impact of the U.K. and European Union (EU) failing to reach a trade agreement and the subsequent influence on sterling are being underestimated by investors.
Thanos Vamvakidis, head of European G10 FX strategy at BofA Merrill Lynch, says that there can be potentially binary implications for sterling against the dollar due to the resultant ramifications of a transitional trade agreement between the U.K. and the EU either falling through or eventually being agreed.
"(That is) extremely important and I don't think the market is focusing enough on this issue…" Vamvakidis said.
"The Brexit negotiations will take two years (and) we know that the new trade agreement between the U.K. and the EU will take much longer. Usually it takes seven to ten years, (look at the) Canada deal with the EU which took seven years."
Britain could be left at the mercy of and be completely dependent on the World Trade Organization (WTO) rules if British Prime Minister Teressa May decided to walk away from the EU with no trade agreement deal, something that she has previously indicated that she would be willing to do.
"No deal for Britain is better than a bad deal for Britain," she had argued in a speech on Jan 17.
"You need something in the interim period, a transition agreement. Without it you go to the WTO rules, this is why agreement transition or not has binary implications… if you have an agreement then we can see cable well above 1.30, if you don't it can go as low as 1.10," Vamvakidis argued.
"Without a transition, you don't have just a hard landing; you have an over-shooting because the WTO rules are much worse than any possible trade deal. This is why we believe it is in the benefit of both sides to avoid the WTO cliff and have an agreement and a transition period," he concluded.
After the U.K. parliament voted overwhelmingly in favor of starting the formal two year negotiation process with the EU, Brexit passed its first legislative hurdle on Wednesday. Prime Minister Theresa May's self-imposed April deadline to begin divorce talks with the bloc could be met as the passing of the legislation could allow Britain to set to complete the legislative process by March 7.
Against the dollar to $1.24 in lunchtime trade on Friday, the sterling added to losses in the previous session to fall 0.2 percent lower. After the Bank of England raised its growth forecasts for the U.K. economy and announced it would be keeping interest rates unchanged, the British pound continued to skew lower.

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