Originally published by IG Markets
While there is still much detail needed, it seems bizarre that the UK will be granted a free trade agreement with Europe, while at the same time gaining full control of their borders and away from the shackles of the European Court of Justice (ECJ), so they can set laws without external influence.
Outside the customs union they can negotiate free trade agreements with US, China, India, Australia etc and all the while having an currency that is not shared and can be influenced fairly easily.
If the UK flourish under this fairly ideal plan (and lets firstly congratulate them on having a plan), then one struggles to see how free trade gets full sign off from the EU-27 at a time of great political change, a move to populism and a growing view that certain countries could be better off outside the EU/EMU. With Merkel and Fillon basing their 2017 elections on being stronger within Europe, one questions the longer-term reverberations of a UK economy that flourishes as a result of a clean Brexit…
Once Article 50 is triggered the ball is in the European's court and they will dictate the terms. Teresa May will be sounding far more conciliatory from here…
Recall GBP is a pure political currency and this gives traders no clarity on the future of UK economics. In fact, the UK economy is looking fairly attractive as we can see on the Bloomberg chart.
(Citigroup (NYSE:C) UK economic surprise index – yellow, UK headline inflation – orange)
If we use longer-term valuation models, such as producer purchasing power parity (PPI), we can see GBP 25% undervalued relative to the USD, while the BigMac index shows GBP is 33% undervalued. At current levels GBP/USD is around 25% below the average since 1980. That’s not to say we will see the pair mean revert, but take out the political issues with regard to Brexit and there is little doubt GBP flies…that is a big ‘if’ as a smooth transition still seems unlikely.
Thoughts and criticism welcomed?
