Wednesday 18 January 2017

Good week for remain campaign as Obama and Carney unleash the Brexit fear factor

Justin Doyle

Published 29/04/2016 | 02:30

US president Barack Obama speaks in front of the European Union Flag at the Hanover Messe Trade Fair in Germany (AP)
US president Barack Obama speaks in front of the European Union Flag at the Hanover Messe Trade Fair in Germany (AP)

As we sat at our desks on the morning of Monday, April 18, the UK's Department of Finance, HM Treasury, released a comprehensive document painting a pretty bleak outlook if the UK electorate votes to leave the European Union.

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It warned that the British government could lose £36bn in net tax receipts, equivalent to 8p on the basic rate of income tax or 7p on VAT, if the UK leaves the EU and negotiates a bilateral trade agreement with the remaining members of the EU.

The almost apocalyptic paper concluded that a Canadian-style model (if the UK negotiated a new trade deal with the EU that did not require freedom of movement) would reduce Britain's GDP by 6.2pc, with many press articles running with the Treasury's forecast that an exit could cost households £4,300 a year.

Two days later, it was the turn of Bank of England Governor Mark Carney to throw his tuppence worth at the debate. Unlike Treasury's paper, he focused more on London's role in the overall UK economy.

He warned that if Britain leaves the European Union, the City of London should expect its pre-eminent role in the global financial system to begin to wane.

Dr Carney also spoke of the uncertainty the referendum is currently causing and he again highlighted the fact that the imminent EU vote is the biggest risk to the UK's financial stability.

The BoE chief justified the Bank of England's stance, saying it would be "political to suppress important judgments". Much to the delight of the Irish export sector and sterling sellers, the single currency slumped to three-week lows (sub £0.79) against a resurgent Pound.

It was, however, the intervention of US President Barack Obama late last week that set tongues wagging. In an impassioned, WWII reference-strewn speech, he hammered home the many and varied reasons why he thinks the UK should most definitely 'remain'.

Standing alongside British PM, David Cameron, the leader of the world's largest economy vehemently recommended that the UK should remain in the EU.

President Obama went as far as to say that if the UK left the EU it would move to the back of the queue for negotiating a trade deal with the US, possibly taking anywhere between a mouth gaping five to ten years to negotiate.

Hillary Clinton, favourite to win the Democratic nomination and in turn the US Presidential race, also weighed in echoing President Obama's stance over the weekend pushing the pound higher again as Asian markets opened late last Sunday evening.

Supporters of the 'remain' campaign rightly used the US intervention to prove that one of the leave campaign's core arguments (ability to quickly negotiate a better trade deal) is intrinsically flawed.

Without doubt, it was a good week for all things 'remain' with the single currency closing well below the £0.78 level (the bottom of recent ranges) reflecting that very sentiment.

It seems that last week's Treasury report, Dr Carney's testimony and President Obama's US intervention are seeing some risk premium of a Brexit unwind in currency markets.

At present, most bookies odds for 'remain' are now at 1/3 (ie, a 75pc chance that the UK will vote to stay), from 4/9 a fortnight ago.

We stand by our core view that the UK electorate will vote to 'remain' on June 23 but if the past fortnight is anything to go by, the remaining eight weeks could very well throw up a few surprises.

Using the Scottish referendum and last year's UK general election as yardsticks, we think it likely that we'll see an increase in volatility in both the polls and the pound as we get closer to June 23.

This may very well throw up some decent sterling hedging opportunities to parties on both sides of the trade spectrum.

Justin Doyle is senior treasury dealer at Investec Dublin

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