British pound recovers modestly in light of the news that UK PM Boris Johnson would discuss a new Withdrawal Agreement (the deal) with the EU. We are not hopeful that the new proposal on Irish border would be accepted by EU members, let alone UK parliament. Johnson’s threat that he will take the country out of the EU if the deal is not accepted suggests that a no-deal Brexit is not ruled out. Yet, our base scenario is further extensions of Article 50 under the Benn Act, under which the government has to seek further delay if it fails to get parliamentary approval of a Brexit deal by October.

Two Borders, for Four Years?

A report by Telegraph suggested that the proposal would involve the introduction of two borders, in order to replace the contentious backstop solution for Ireland and Northern Ireland. First, there would be a regulatory border in the Irish Sea between Britain and Northern Ireland, active for four years. Second, there would be a border for customs checks between Northern Ireland and Ireland. Essentially, the proposal seems to let Northern Ireland leave the EU customs union together with the UK. However, agriculture and industrial goods could stay in the single market until 2025. The EU affirmed that it has not received viable alternative to the backstop solution. We expect the plan would trigger intense debate among EU members as exemptions would have to be granted to facilitate a Northern Irish customs border.

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If EU’s approval is secured, the proposal will be voted by UK parliament on October 19. Passage of which would result in the UK leaving the EU on October 31. In a more likely event that the parliament rejected the bill, the government would have to seek further extension of Article 50 until January 31, 2020. In this case, we believe the chance of an early election would increase.

Despite Johnson’s defeats in the parliament, his Conservative Party continues to enjoy rising support in opinion polls. Supports for Tories bottomed in June and has gained 10 percentage points since then. Its lead over Labor has recently reached the highest level since 2017. With over 30% support, compared with over 20% in Labors and Lib Dems, Tories could remain the largest party after the new election. Without regaining majority suggests that future negotiations of a Brexit deal would still be challenging. We expect British pound to remain volatile in the near- to medium-term.

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