The 12-point plan – the view of Brexit from Australia

While there is still clarity needed, it seems bizarre that the UK will be granted a free trade agreement with Europe, while also gaining full control of their borders away from the shackles of the European Court of Justice (ECJ) to set laws without external influence.

Pound
Source: Bloomberg

Outside of the customs union, the UK can negotiate free-trade agreements with US, China, India and Australia (among others), all the while having a currency that is not shared and can be influenced fairly easily.

If the UK flourish under this fairly ideal plan (we should firstly congratulate them on having a plan), then one struggles to see how a free-trade deal gets full broad sign off from the 27 European Union members 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 Angela Merkel and Francois 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 Europe’s court - they will dictate the terms. Teresa May will be sounding far more conciliatory from here.

GBP is purely a political currency and the 12-point plan and road ahead gives traders no clarity on the future of UK economics.

If we use longer-term valuation models, such as producer purchasing power parity (PPI), we can see GBP is 25% undervalued relative to the USD, while the Big Mac 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’s mean revert, but if you take out the political issues regarding Brexit means there is little doubt GBP flies. That, of course, is a big ‘if,’ as a smooth transition still seems unlikely and the consensus in the market remains to sell GBP into higher levels.

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