UK: Resurging political uncertainty to put slight upside pressure on CHF and JPY - Nomura

UK political uncertainty is again rising and analysts at Nomura suggest that their main scenario remains that the UK and EU reach an agreement on the transition deal, but in the near term UK politics will likely be the main driver of GBP.

Key Quotes

“In fact, GBP’s reaction to UK politics and our Brexit stress tracker is rising again. The estimated sensitivity is still more muted than a year ago, but now GBP’s negative reaction is more concentrated against the traditional safe-haven currencies, CHF and JPY. Thus, if UK political uncertainty keeps rising, CHF and JPY will likely face appreciation pressure into the important EU summit on 14-15 December. If an agreement is reached then, we would a small relief rally in GBP/CHF and GBP/JPY.”

“Our main scenario remains that the UK and EU reach an agreement on the transition deal, but in the near term UK politics will likely be the main driver of GBP. In fact, GBP’s reaction to UK politics and our Brexit stress tracker is rising again. The estimated sensitivity is still more muted than it was a year ago, but now GBP’s negative reaction is more concentrated against the traditional safe-haven currencies, CHF and JPY. Thus, if UK political uncertainty continues to rise, CHF and JPY should face appreciation pressure into the important EU summit on 14-15 December. If an agreement is reached then, we would expect a small relief rally in GBP/CHF and GBP/JPY.” 

“UK political uncertainty should also put slight downside pressure on EUR/JPY for the time being, although we still expect EUR/JPY appreciation into 2018 and we keep our EUR/JPY long recommendation.”