Currency market anticipates Johnson-style hard Brexit

Despite a defeat in a televised debate, it is almost inevitable that Boris Johnson will be named Conservation Party leader and new prime minister on July 22. The pressure is already mounting on him to leave the EU even without proper agreements.

The battle for the British premiership is over. Secretary of State Jeremy Hunt showed his predecessor Johnson around the room in a debate on Tuesday evening. When asked whether he would resign if Britain fails to lead from the EU by October 31 at the latest, Johnson did not get much further than what critical Guardian journalist John Crace nicely sums up as 'Piffle paffle wiffle waffle'. In his columns and books, Johnson often strikes just the right chord, but in a direct debate he is all too often tongue-tied.

Defeat without consequences
The good news for Johnson is that defeat in the televised debate matters little. He has been smart enough to only start the discussion when a very large part of the party members have already put their vote on the bus. It is also questionable whether the war of words has much influence on the choice of the members of the Conservative Party. According to betting offices, Johnson's victory can no longer be missed. For every pound you bet on his victory, you will receive a maximum of 1,07 pounds in a week and a half. For Hunt, that's a whopping 10 to 14 pounds. The bad news for competitive Brits is that the benefit in euros may soon be worth a lot less.

Pound down hard
Currency markets have already taken a big lead on a Johnson win. The pound has fallen by more than 5% against the euro after the first week of May. Johnson has stated that he is not afraid of a hard Brexit without good agreements. In that scenario, the borders with the EU will close on October 31, so that the free movement of people and goods will come to an end in one fell swoop. It is estimated that the economic damage to Britain will reach £250 billion over the next decade.

Head down in the swamp
Still, there is a good chance that Johnson would rather take that pain than antagonize the members of the Conservative Party. No less than 54% of them even want to go through with Brexit if that would mean the end of their own party. He also does not want to get entangled in the same morass of postponement and hopeless voting rounds in which his predecessor Theresa May already went under. There is therefore a very good chance that Johnson's language as prime minister will soon be a lot more decisive than piffle paffle wiffle waffle.  

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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