Pound's fate could worsen as investors see multitude of risks

London

POUND traders are faced with several scenarios as political turmoil surrounds UK Prime Minister Theresa May, and few look positive.

With last week's events suggesting that Mrs May's Brexit plan doesn't have strong support, investors now wonder what the premier's next move will be if her deal is rejected in Parliament. Her options include negotiating another deal with the European Union, holding a second Brexit referendum or even a general election, all as she faces the possibility of a no-confidence vote in her leadership.

Any of these events would make reaching a divorce agreement between Britain and the EU by the end of the year extremely difficult and the pound could plunge to US$1.20, according to Credit Agricole SA. BlueBay Asset Management and Aberdeen Standard Investments are among those who are similarly pessimistic on the currency's outlook.

"The chance of the existing deal going through looks low," said Mark Dowding, a money manager at BlueBay, which oversees the equivalent of US$60 billion. "In the short term, a no-deal probability will rise."

Sterling steadied on Friday after dropping more than 2 per cent at the peak of the UK political drama a day earlier. The pound could slide when trading resumes in Asia on Monday should 48 Tory MPs submit letters of no-confidence in Mrs May. Her determination to stay as PM seemed to reassure the market in the short term, but longer term, the Parliamentary vote on the Brexit deal remains the key hurdle.

BlueBay's Mr Dowding is short pound versus both the euro and dollar, and is also short gilts on the view that a significant collapse in the British currency would hit all UK assets.

Sterling could reach US$1.20 in a very short time if the deal doesn't pass the lawmaker hurdle, said Credit Agricole's Valentin Marinov.

"Given that the currency markets are the most liquid asset at investors' disposal, shorting the pound could become the path of least resistance or, if you wish, the Brexit pressure valve, for many clients," said Mr Marinov, head of Group-of-10 currency strategy at the French bank.

"This could mean that the drop toward US$1.20 may take less than a week."

The market has turned more bearish on the burgeoning UK political crisis, with demand for options to sell the pound climbing to the highest since 2016. James Athey, a money manager at Aberdeen Standard, which oversees US$736 billion, said he exited his long position in pound-dollar on Thursday morning as the political turmoil clouded the short-term outlook for the currency. BLOOMBERG