On 18 April 2017, Theresa May called for a surprise snap general election to be held on 8 June. While the initial view was for a comfortable Conservative victory, the most recent polls suggest otherwise. There are four possible outcome to this election i.e. (1) Conservative enjoys a two?thirds majority; (2) Conservatives wins with a simple majority; (3) Hung parliament with a Conservative forming the government through coalition; and (4) Hung parliament with a Labour forming the government through coalition.

On the currency, (1) a Conservative party victory with a two?thirds majority win could see the pound strengthen to around the 1.30 level against the USD in the near term and MYR should hover around 5.60 against the pound. A simple majority win by the Conservatives would likely cause the pound for a reversal to hover around 1.26 level against the USD in the near term with MYR trading around 5.41 against the pound during this period. If a hung parliament appears, the pound will come under strong pressure to weaken to levels below the pre?election of around 1.24 against the USD and MYR strengthening to around 5.34 levels. Finally, an unexpected win by the Labour party is likely to weaken the pound strongly due to sentiment and perception issues, expected to drop as low as 1.21 against the USD while MYR gains to 5.26 against the pound.

Snap election on June 8

• On 18 April, 2017, Theresa May called for a snap general election (GE) which will be held on 8 June instead of going through the full term which will last till 2020. The decision came as a surprise.

• Although expectations are for the Conservatives party to win the GE, it remains unclear on the outcome of the results. Initial perception was for the Tories to win with a higher number of seats to 400+ from the current 330 out of the 650 seats in the House of Common seats, suggesting a possibility of a two?thirds majority.

• However, the latest view is somewhat suggesting the Tories party may only enjoy a simple majority given that the opinion polls favouring them has dropped from a 24?point lead on 19 April to 13 points on 29 May against the Labour party. Expectations are the Tories may end up as low as 326 seats or 50% or even below, heightening the risk of not being able to form the government without the aid of other parties especially if they garner anything below 325 seats.

• There are four possible outcomes from the UK election and will have different implications on the financial markets:
  1. Two?thirds majority – Conservatives win at least 434 seats out of 650;
  2. Simple majority – Conservatives win at least 326 seats out of 650;
  3. Hung parliament with a Conservative Prime Minister – Conservatives win less than 326 seats, but they are able to command support from a majority of MPs, possibly through a coalition.
  4. Hung parliament with a Labour Prime Minister – Conservatives win less than 326 seats, but Labour are able to command support from a majority of MPs, possibly through a coalition.
   
• A Conservative party victory with a two?thirds majority win would augur well for the pound as it will be supported by pro? growth policies with the view of a softer Brexit. Our estimation shows the pound could strengthen to around the 1.30 level against the USD in the near term. During this period, MYR should hover around 5.60 against the pound.
   
• A simple majority win by the Conservatives may cause the pound to react on a reversal mode immediately from the current levels. We expect the reversal of pound to hover around 1.26 level against the USD in the near term. During this period, the MYR should hover around 5.41 against the pound during this period.

• Meanwhile, a hung parliament would add strong pressure on the pound to weaken. Possibilities for the pound to fall below the pre?election levels to around 1.24 against the USD remains high. Should that happen, the MYR is expected to strengthen to the 5.34 levels.

• An unexpected win by the Labour party is likely to add weakening pressure on the pound largely driven by sentiment and perception issues. On the extreme scenario, we foresee the pound hovering around 1.21 against the USD. During this period, MYR should hover around 5.26 against the pound.

Source: AmInvest Research - 2 Jun 2017