Cape Town – The rand spiked suddenly after a new poll put Labour party leader Jeremy Corbyn ahead of Conservative leader Prime Minister Theresa May for the first time as the English go the polls on Thursday.
Wired published the results of the poll conducted by London research company Qriously on Thursday morning, sending the rand into a tailspin. Most other polls put the Tories in the lead, but Qriously correctly predicted the outcome of the Brexit referendum, the Italian constitutional referendum, the Dutch general election and the Turkish constitutional referendum.
The rand lost 10c against the pound and 5c against the dollar in a matter of minutes on Thursday and was trading at R12.85/$ and R16.67/£ by 09:20.
“The survey puts Labour on 41.3% of the vote and the Conservatives at 38.5%, making the final result too close to call because the difference falls within the 3.2% margin of error,” Wired reported.
"This is the first poll that gives an outright lead for Labour," Christopher Kahler, Qriously's CEO, told Wired. "But our results are not wildly out of line with what other polls are predicting. It’s generally agreed that it will be a close-run election."
11:30 Update: The rand had edged higher to R12.87/$ by 10:35. However, the rand has strengthened since then after a report in the Telegraph published at 10:30 said most polls put the Conservatives in the lead. "Even YouGov, who have tended to estimate higher Labour support than most pollsters, recorded a three point drop for Jeremy Corbyn's party in their final poll," the Telegraph reported. The rand was back at R12.83/$ at 11:30.
Rand could drop by 5% on Labour victory
The sudden drop in the rand came as Rand Merchant Bank analyst John Cairns warned in a morning note on Thursday that a Labour victory would see the rand lose as much as 5% to the dollar.
“Expect a 5%-10% decline (in Sterling and therefore GBP/ZAR) in the unlikely event that Labour wins,” he said. “(Expect) a 2%-5% drop in the plausible scenario of a hung parliament (and) a modest relief rally in the core scenario of an unspectacular Conservative win.
“(Expect) a 2%-5% gain if the Conservatives increase their seats,” he said.
“Such a wide range of outcomes is seen as possible as polls have shown sharp differences and because there is a huge uncertainty over whether young voters, predominantly Labour supporters, will actually vote,” he said.
“The expectation of large moves, meanwhile, hinges on the vastly different economic programmes of the two parties, as well as the implications for Brexit.
“Sterling moves, meanwhile, will spill into the euro, and therefore EUR/ZAR is also exposed to the result. Big USD/ZAR moves would only be seen in the extreme scenarios, the impact coming through risk appetite: a Labour win would create worries, a Conservative gain would help market confidence.”
GRAPH: Rand/dollar intraday movement (Source: Bloomberg)
UK votes as narrowing polls indicate 5 scenarios
By Bloomberg’s Thomas Penny and Svenja O'Donnell
Polls are open and voting is underway in a UK election dominated by Brexit, austerity and in the closing phases, security.
The first indications of the result will come at 22:00 London time, when broadcasters will release an exit poll. While such surveys have generally been accurate in the past, they are not precise and the final result will not be known until Friday morning.
Prime Minister Theresa May called the snap election to grow her parliamentary majority and secure her Conservative vision for Brexit. But a series of political missteps threw her off and two terror attacks changed the tone and direction of the campaign. Her main rival Jeremy Corbyn, an old-school socialist and leader of the Labour Party, instead gained momentum with a focus on inequality, free education and billions more in public spending.
With polls narrowing, investors are bracing for a range of possible outcomes. Her majority in the House of Commons at the time was 10 - with 330 seats out of 650. Success for May will be judged against that benchmark.
Here are five scenarios.
1. 100+ Conservative majority
If the goal of the election was to give May an “unassailable position for the next five years,” then this would count as mission accomplished, silencing critics of her lackluster campaign performance. This kind of majority would send a signal of stability, and drive sterling up.
May can execute her version of Brexit, knowing that the incoming army of Tory lawmakers should be loyal to her. Yes, she has warned that she is willing to walk away from a “bad” deal and that control of immigration is a priority. But a bigger majority also gives her room to make concessions on things such as money to win a post-Brexit trade pact and a transitional period.
“With this majority the party can say ‘mistakes were made but the outcome is a very positive one’,” said Wyn Grant, professor of politics at Warwick University. “It makes a hard Brexit much more likely.”
2. 50+ Conservative majority
This is a disappointing outcome for “Theresa May’s team” and makes her vulnerable to a leadership challenge during the two delicate years of complex divorce talks from the European Union. But on the cards, it's a workable majority so the pound could strengthen depending on how traders are perceiving the political risks.
As for her Brexit plan, it would now be at the mercy of hard-line Euroskeptics, limiting her scope to make the concessions the EU may demand for a trade deal or a transitional period. EU officials might also sense her weakness and seek to use it against her.
“Anything less than a 50 seat majority looks like a gamble that’s not paid off and it would make it less likely she’ll contest the next election,” said Andrew Russell, professor of politics at the University of Manchester. “If you’re a European leader right now, you look at this car crash and think she’s going to have to swallow this pretty hard.”
3. Less than 10 Conservative majority
If the country wakes up on Friday morning to May in a worse position than she was when she called the election, her days in power would seem numbered and there would be a sell-off of the pound. She still needs the support of lawmakers who campaigned for Brexit, reducing the chance she can smoothe the exit by making trade-offs with the EU.
With her credibility shot at home, negotiators in Brussels could try to exploit her domestic standing, knowing they can get more of what they want or that they will probably face a different adversary soon.
“Can she come back from that? No. She’d look like a wounded animal,” said Steven Fielding, professor of politics at Nottingham University. “People will react to that, people will ask questions about her leadership. It’s not a defeat in numbers but it’s not a mandate.”
4. No majority
This opens the door for a possible alliance of parties to get enough seats to replace the Conservative government — the “coalition of chaos” that May repeatedly warned voters to reject. For Brexit, it probably means forget about negotiations starting the week after next as the country’s political class becomes consumed by a domestic crisis with both sides looking to cobble together a coalition. “There would be a meltdown,” Russell said. “It would mean another election within months and the whole Brexit strategy would be shot to pieces.”
The chances of a softer Brexit have magnified as May would be unlikely to lead the Tories into another election and Corbyn could try and form a government with the pro-EU Liberal Democrats as well as the Scottish National Party and Welsh nationalists, Plaid Cymru. Suddenly the option of staying in the single market and ceding ground on immigration becomes plausible.
The risks are that markets are roiled by the uncertainty and differences among the parties make it harder to strike an agreement with the EU. For UK stocks, the worst outcome may be a hung parliament. It would also cause the pound to weaken.
5. Labour majority
This would be a shocker that could radically change the direction of Brexit. Corbyn has said he accepts the outcome of the referendum although at times he has avoided being so explicit.In the immediate short-term, talks might be pushed back. EU governments might also be persuaded to delay the departure date from March 2019 to give Corbyn time to craft a plan. “Brexit would be delayed while Labour works out what the hell to do,” Grant said.
While Corbyn has a Brexit team in place— and Keir Starmer will be a friendlier face across the negotiating table than David Davis — the big question is how will he form a government given how many of his own lawmakers wanted him gone a year ago.
After a period of uncertainty, markets might eventually rally at the prospect of a government that wants to retain the benefits of the single market, will guarantee the rights of EU citizens living in the UK from “day one” and not make controlling immigration the red line it was under May.