Brexit Special: T – 1 Month for Brexit

GBP volatility is through the roof at the moment – GBPUSD and EURGBP implied volatilities are at some of their highest levels in the post-Brexit vote era. The reason: the next 4 weeks is realistically ‘make or break’ for Brexit.

The possible permutations of how Brexit will play out over the coming period are near enough to endless. However, there several outcomes that are more probable than others which is what I want to cover.

I need to quantify and outline the crux of Brexit. The June 2016 Brexit vote asked a binary question for what was really a multi-dimensional, multi-political idea.

• Did the UK people vote to the leave the Single-Market or to change the rules around immigration?

• Did the UK want to use the Westminster legal system rather than that of Brussels?

• Was it a combination of these issues or other issues not mentioned?

This was then rolled up into one Yes/No question – that is why Brexit is such a mess.

Upcoming key date – likely to see max intra-day volatility.

• 25th November – Emergency EU Summit

• 13th – 14th December – Final European Summit of 2018

• 10th – 18th December – Date range for the Commons Vote (actual date not confirmed yet)

The intraday trading in and around these events as critical – This chart of GBPUSD over the 3 days the draft Withdrawal Agreement was ‘agreed’ upon illustrates perfectly the volatility that is likely to occur around these dates.

The conclusion from the trading pattern is to have a slight GBP bias v USD and EUR with a strategy of reducing exposure into the votes and to be mindful of the ‘political fallouts’ post the dates.

Possible political permutations of Brexit

‘No Confidence’ vote – leadership spill

1. Looks unlikely now having survived the peak ‘sniping’ period – only 25 letters were received during this time. 48 letters are needed just to start a spill motion and then the majority of conservative MPs need to vote against May’s leadership to bring on a spill – meaning a total 159 Tory MPs need to vote against her.

2. The contenders: Who could replace her as PM is evenly split over at least three candidates making the process of replacing her even more unruly than it already would be. The risk for the (or any) challenger is ‘spill failure’ which would mean a 12 month relief period for May as she cannot be challenged for a year post a spill challenge.

3. The PM position right now is a poison chaise – finding a deal with Brussels and the Commons and then that deal to be accepted by the people is near impossible and thus will tarnish any PM – thus any MP with leadership ambitions is unlike to want to have an actioned Brexit as their legacy.

Thus, will there be a leadership challenge in 2018? No. Again this has a GBP long bias, look to pick up pips here and there. However come April 2019 post the Brexit timeframe, May will most likely be challenged and ousted, in my opinion.

Parliament Votes on ‘Deal’
• The question is how many attempts will be needed to get a deal through the Commons. I believe it will fail at least once as the numbers are razor thin and the current Withdrawal Agreement is already on the ropes from inside the Tory party, so at least two vote take place.

• The group to watch is the DUP which have stated they will not support the current draft Agreement, thus for it to pass the Commons in its current state every single Tory MP plus 4 ‘other’ (Labour, Lib Dems, Greens et. al.) MPs would need to support it.

• Now, the PM’s Whips are likely to pull the DUP and some of the 25 Letter senders into line with ‘doomsday’ predictions if nothing is voted through. BUT even in this scenario reaching the magical 320 MPs needed for a Deal looks THIN!

• Another thought is the 25 Letter senders hold firm the DUP supports the PM meaning 19 ‘others’ would be needed for deal.

In short we have to assume at least one failure at a minimum.

The vote is expected between the 10th and 18th of December – it is the single biggest risk event for GBP for 2018. A short GBP bias leading into the first vote looks like the correct trade but only with small parcels due to the risk involved.

A General Election

Least like of all the ‘permutations’ suggested currently. It is highly discussed topic in GBP markets as it brings into focus what a Corbyn-led government would mean for the UK, Brexit and the like?

However for a general election to be called, 66% of all sitting MPs need to vote for it. That would mean over 100 Tory MP’s would have to vote in favour of a general election – HA! That would mean risking power and putting their ‘scorched earth’ scenario in play – a Corbyn-led government. A general election isn’t even worth discussing. Have a GBP long bias each time you hear this being discussed.

Second Referendum

Has a slightly higher probability than a general election in my opinion however would have to say the probability is sub-10%. However,

• If the first vote fails as expected, the chance of a second Brexit referendum will rise as the market panic will lead to a growing call for a second referendum vote.

• However, the political and democratic repercussions of a second vote are monumental. Thus, the panic would only be a small step towards a second vote, things would have to worsen further still to get this idea to get up.

Would have to suggest that a second referendum is a pipedream and that holding a GBP long bias around this talk would be beneficial.

Other Permutations

• PM May loses support of her Cabinet – the Gang of 5 (Gove is the kingpin here) continue to hold their resignations over the PM. Risk here is there is no real time frame to this event and thus is a general short GBP risk to be aware of. Look at the reaction to Raab’s resignation.

• May tries one more pass at EU on trade – EU won’t budge so May will continue to look weak and thus loses support.

• Irish border issue cause DUP to completely walk and thus Parliamentary vote is doomed.

Conclusion

GBP will remain highly volatile on an intra-day and intra-week basis over this coming period.

However, leading into the second week of December is likely to net appreciate – thus long bias on Cable and short EURGBP are the best options for right now. However once timeline for Parliament Vote is announced, strategy is to reduce exposures and even reverse trade as it is highly likely the vote will fail on first attempt – Remember the vote is the most important event of the 2018 Brexit timeline.

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