(MENAFN- Khaleej Times) Sterling was on the ropes last week on political risk as Prime Minister Theresa May faced a no-confidence vote from the ranks of her own Tories. No less than 40 MPs in the House of Commons would sign a letter of no-confidence against Mrs May, just short of the 48 needed to trigger a leadership challenge. Mrs May's botched general election campaign and now this Tory revolt in Westminster weakens her hand in the Brexit negotiations with the EU. This means lower "soft Brexit" risk and so a lower sterling.
The news that Boris Johnson and Michael Gove, the two most visceral Brexit fanatics in the Tory political constellation, wrote a "secret letter" to the prime minister outing their plans for Brexit without a trade deal with the EU is also sterling bearish. The leaks also demonstrate the bitter political divisions in the Tory Cabinet and among backbenchers MPs. As if all this was not bad enough for Downing Street, the EU has turned nasty in demanding a financial divorce settlement from Britain. Northern Ireland's post-Brexit border with the Irish Republic is another brewing political time bomb and the prime minister is compromised with her reliance on the Democratic Unionists to maintain her parliamentary majority. I now fear Planet Forex will test sterling lows below 1.30, possibly down to June and August trendline support in the charts.
Anti-corruption crackdowns in China and Saudi Arabia mean a sharp fall in offshore flows into British property at a time when Brexit has gutted investor sentiment, rents and transaction volumes for the City of London commercial property. The fall in financial flows into UK gilts, shares and London property is unquestionably sterling negative.
Positioning data from the Chicago futures market suggests speculators have shifted from net buyers to net sellers on sterling. At the same time, one-month implied volatility on cable has risen 13 per cent while risk reversals have swung 20 basis points. True, sterling has priced the bad politics and EU news though not Mrs May's resignation or a collapse in Brexit trade talks mean cable plunges to June lows at 1.28. The US dollar's outlook, UK economic data and the prospect for a second Bank of England rate hike are. Mark Carney's "dovish rate hike" was unquestionably the reason sterling failed at 1.36 and I immediately scaled back the odds of a 1.40 post referendum retest. Net net, cable trades in a 1.28-1.34 range next month. I am a seller on strength. In the Age of Brexit, Boris and the Bank, sterling volatility is king.
The slide in the US/global stock markets in the five trading sessions has seen the euro spike to October highs at 1.860 as I write. The Japanese yen has also surged to 112.60 on clear evidence of safe haven buying as the Nikkei Dow loses 1,000 points and Asian equities succumb to the spasms of risk aversion.
I was stunned to see iron ore plunge five per cent in a single session and take the Aussie dollar down with it and there are now rumors in Canberra that Prime Minister Malcolm Turnbull, despite his Goldman pedigree, is on his political death rattle while the RBA is on hold. With three Fed rate hikes in 2018, I can see the Aussie dollar plunge to 68 if the global economy slumps next year. The fall in Brent crude after the US inventory data has taken a predictable toll on emerging petrocurrencies. The Russian rouble has now fallen to 60. The Mexican peso, which faces Nafta/Trump risk, is at 19.20 despite the central bank's foreign exchange hedge auctions. The US dollar's woes and UK wage data alone presented sterling from falling below 1.30 on Westminster and Brussels risk.
Fed Funds futures contracts in Chicago imply that the capital markets now price in one rate hike in 2017 after the carnage on Wall Street last week, not the three rate hikes implicit in the FOMC dotplot. This is insane, especially if the US Congress enacts tax reform. Though I await the Senate version, there is no doubt that the illusion of revenue neutrality has been jettisoned by America's legislators.
Trumpian "trickle down" economics means a trillion-dollar Uncle Sam deficit, a surge in wage pressures and inflation risk, a bloodbath in the bond market as interest rates spike next year. The Yellen (or Powell) Fed are behind the curve. The US Treasury yield curve continues to flatten, a sign of sure future central bank hastiness (monetary tightening).
The writer is a global equities strategist and fund manager. He can be contacted at .
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