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Rand wins as UK hung parliament raises Brexit concerns

Jun 09 2017 07:51
Fin24 and Bloomberg

Britain's Prime Minister Theresa May gives a speech at Abercrombie House. (Jane Barlow, PA via AP)

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Cape Town – The rand strengthened quickly against the British pound on Friday, after England’s election results shattered UK Prime Minister Theresa May’s plan of consolidating power in parliament 10 days before Brexit negotiations were set to begin.

Reversing her party’s previous position of having a majority in parliament, the early UK election resulted in a hung parliament and an unclear course in its approach to exit the European Union.

While the last seven seats were still being counted at 07:45, the BBC had called a hung parliament, as there are not enough seats for the Conservative Party to win to change this outcome.

READ: Four Brexit scenarios after May loses bid for stronger hand

The rand gained strength against the pound on Friday at 07:45, trading 2% firmer at R16.39 to the sterling. It also gained marginally against the dollar, trading 03% stronger at R12.88.

The strength in the rand surprised analysts. “I would have thought that such news will cause investors to scale back their emerging market portfolio until there is greater certainty,” Umkhulu Consulting analyst Adam Phillips said in a morning note.

GRAPH: Rand/pound on Friday (Source: Bloomberg)

Phillips warned of emerging market volatility and the rand’s possible decline with the coming Moody’s rating announcement at the close of markets on Friday. Analysts expect a ratings downgrade to one notch above junk status.

READ: May's future in danger as Brexit election gamble backfires

“Emerging market currencies are likely to be very nervous today and, for the rand, Moody's will announce their latest rating tonight,” he said. “One notch and it will hang around where it closes in the South African session. A two notch fall and we go back into the 13s, if we don't already on the back of what has happened overnight.

“It certainly won't be a quiet day and, if anything, the situation in the UK and Europe makes the overall situation in the world look more confusing this morning.” 

Markets muted on hung parliament

While the pound tumbled across currencies, other assets shook off the election results.

Sterling dropped the most since January as the ruling Conservative Party was on course to win the most seats, but will fall short of an overall majority.

The impact was far more muted elsewhere, as volatility measures retreated. S&P 500 Index futures advanced along with equities from South Korea to Singapore. Gold dropped for a third day, while Treasuries were little changed.

“Even though we’re seeing higher sterling volatility, there’s even less prospect of that spilling into broader markets,” Ray Attrill, head of foreign exchange strategy at National Australia Bank in Sydney, told Bloomberg TV. “This is still a little local difficulty rather than an event of global proportions.”

Investors fret about another spasm of political turmoil less than a year after Britain voted to leave the European Union. Theresa May’s future as prime minister was thrown into doubt after her gamble to call an early election backfired just 10 days before Brexit negotiations are due to start.

“We’ve had some pretty benign reaction so far,” John Woods, chief investment officer for the Asia Pacific at Credit Suisse, told Bloomberg TV. “A hard Brexit now is yesterday’s story.”

UK, ECB and Comey leave traders unfazed

The election results cap a day of major events that riveted investors all week. But just as traders shrugged off the UK vote, they also weren’t fazed by the European Central Bank’s policy decision or testimony from former FBI director James Comey.

ECB president Mario Draghi said the euro region still isn’t generating enough inflation, overshadowing improved prospects for the economy that led officials to upgrade their growth assessment.

In Washington, Comey and Donald Trump accused each other of lying about their private encounters in the wake of dramatic Senate testimony that centred on whether the president sought to quash part of a federal probe into Russian meddling in the 2016 election.

uk elections  |  markets  |  brexit  |  currencies  |  rand


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