Jaded Pound Analysts Are Unconvinced by Latest Brexit Deadline
When it comes to Brexit trade deal deadlines, talk is cheap.
(Bloomberg) -- When it comes to Brexit trade deal deadlines, talk is cheap. That’s the view of an increasing number of currency strategists after negotiators again pushed back the cutoff point for talks, this time until Sunday.
RBC Europe Ltd., Nomura International Plc and Citigroup Global Markets Ltd. are focusing instead on Dec. 31 when the Brexit transition period officially ends, and there’s even speculation at banks about an informal extension into 2021 amid sputtering political progress. The pound fell as much as 1.2% on Friday to $1.3135, its lowest since Nov. 13.
“Any notion of a timeline is increasingly unreliable and we wouldn’t be surprised if talks drag on into next week,” said Adam Pickett, a foreign-exchange strategist at Citi in London. He still sees an 80% chance of a “bare-bones” deal by year-end that could lift the pound to around $1.40.
And the clock really is ticking this time. Talks could collapse or succeed this weekend to trigger outsized moves in the pound. U.K. Prime Minister Boris Johnson has warned of a “strong possibility” of a no-deal outcome. It’s a warning heeded by traders. They’ve pushed the relative premium to hedge sterling losses versus the euro over a three-week period -- currently covering year-end -- close to the highs last seen in the aftermath the 2016 Brexit referendum.
Brexit has long been a headache for strategists as each political development dragged sterling in its wake, with several summits and lawmakers’ votes over the years doing little to change the bigger picture. The challenge this time around is that sterling liquidity in both spot and volatility markets is thinning ahead of the weekend, according to two Europe-based traders.
Worthless Options
Options traders have grown used to piling up Brexit hedges and are taking similar positions this week. They’re positioning for increased turbulence in sterling, with the cost of hedging swings in sterling over the coming week the highest since March.
“A lot of premium has been spent on pound hedges for lots of deadlines over four to five years that never amounted to anything,” said Jordan Rochester, a strategist at Nomura International Plc. Take last November -- investors preparing for a Halloween shock after a Brexit deadline placed billions of pounds in options, most of which expired worthless.
Attention is now turning to New Year’s Eve, when Britain’s transition period to cushion its departure from the European Union will expire. Without a deal, Britain will trade under World Trade Organization rules and sterling could fall to $1.25 by mid-2021, according to a Bloomberg survey.
Not everyone is skeptical about the latest deadline. The time-frame can’t be stretched indefinitely and European politicians have indicated they don’t want to work through Christmas, said Jane Foley, Rabobank’s head of foreign exchange strategy. At Monex Europe, foreign-exchange market analyst Olivia Alvarez Mendez says deadlines “are hardly to be trusted,” but still sees a deal as the more likely outcome.
Yet there are those who question how definite even the year-end cutoff point really is. RBC Europe’s head of currency strategy, Adam Cole, said the two sides might reach a temporary arrangement to extend the transition. By that point the pound would be rallying, and it may be time for investors to jump ship.
“Our advice would be to sell into the rally on the grounds that there will be significant disruption, even with a deal,” he said.
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