Analysts at Nomura explained that trading the road to Brexit has been a rough ride.
Key Quotes:
“The currency has several times detached itself from where rate spreads and macro fundamentals suggest it should be and then on some BoE forward guidance it snaps back again.”
“When negotiations are at a standstill it’s easy for the Brexit news flow to turn rather sour and therefore the market rather short GBP.”
“But in dealing with the EU, the pattern is that a last-minute deal can be made. While we and the market stay focused on the tail risks, we need to keep in mind the base case.”
“We think a Chequers type of agreement or some form of it will go through and a political fallout is avoided in between.”
“Right now the market is very focused on the negative tail risks, which we have advised to hedge for. But the market has now focused on the chances of political fallout so much that it could be just one headline of progress that could lead to a substantial short squeeze.”
“The main risk to a short EUR/GBP trade is that EUR data surprises continue their course and the UK lags behind. But Italian and Turkey underperformance continues and may be an offsetting weighing factor. EUR data surprises have surpassed that of the US’s for the first time since 2017 and will soon likely overtake the UK’s.”
“Part of this reflects EUR data genuinely improving and also economists lowering their expectations, therefore lowering the bar for a positive surprise. The UK however looks to be treading water with trend growth surprises and trend growth (see grey lines in Figures 1 and 2). But that is in itself an impressive feat given the level of business uncertainty in these “No Deal” Brexit warning times. Beyond the data momentum, FX market positioning is another reason why a short EUR/GBP trade may suit; the market is rather short GBP, but is still net long EUR on the margin.”
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