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Johnson Wins Conclusive Majority, Triggering 450-Basis Point Rally

Karl Schamotta December 12, 2019

Exit polls are showing that Boris Johnson has won a majority in tonight’s election, making it likely that he will succeed in taking the United Kingdom out of the European Union by the end of January. According to an analysis conducted by Ipsos Mori for ITV, Sky News and the BBC, the Tories are projected to win 368 seats, well above the 328 needed to constitute a majority in the House of Commons – the party’s biggest victory since 1987.

Jeremy Corbyn’s Labour Party is expected to suffer a bruising loss, taking 191 seats, down sharply from the 262 previously held. Mr. Corbyn had campaigned for a second referendum on the Brexit issue, but also threatened to implement a wide range of business-unfriendly policies.

Mr. Johnson is now likely to table legislation that will formalize the previously-negotiated Withdrawal Agreement, severing ties on January 31. If this is passed into law, the clock will start on a transition period in which both sides must negotiate a new free trade agreement that avoids a shutdown in business at the end of 2020.

The pound suffered severe turbulence as Britons went to the polls, trading through a 200-basis point range as the evening progressed, before staging an absolutely spectacular rally that saw the pound-dollar rate rise more than 450 basis points from the low.

Admittedly, the move may have been exacerbated by exogenous forces – late this afternoon, the Federal Reserve promised to deliver more liquidity, and as the first exit polls were released, Donald Trump signed a trade deal that should avert another round of tariffs.

The Federal Reserve Bank of New York said it will conduct term operations amounting to $365 billion through year end, providing additional liquidity to interbank funding markets that have been showing signs of stress in recent weeks. Overnight actions totalling $150 billion will be executed on December 31 and January 2 – limiting downside risk during a period that traditionally sees a sharp thinning in liquidity.

In a step that could significantly lower tensions between the US and China, reports suggest that the “phase one” agreement will see levies on approximately $160 billion in US imports from China – originally scheduled for implementation on Sunday – cancelled. Legal details remain unclear, and Chinese concessions are as yet unknown.

But the surge – in a major, heavily-traded currency pair – is extraordinarily-large nonetheless, and could gain momentum as the Asian session begins in the coming hours.

With two major political uncertainties temporarily nullified, markets seem to be setting up for a Santa rally – and bored currency traders are suddenly finding their stockings stuffed with possibilities.

Karl Schamotta
Chief Market Strategist
@vsualst

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