Brexit Day Arrives: Why One Trader Thinks It Will Lead To A "Hefty Rally" In Sterling

Tyler Durden's picture

With Theresa May's signed Brexit exit letter due to be delivered in just over an hour to Europe, "severe risks to the U.K. economy litter the path ahead" but as Bloomberg's Mark Cudmore writes overnight "this isn’t the time to trade on them." Instead the former FX traders lookat flows, and specifically the record speculative sterling shorts, and notes that "at some point, these positions have to be unwound" adding that "after Brexit is officially triggered, there are no other concrete dates on the horizon for bad news, so many shorts will be closed." His conclusion: "As a result, from Thursday, it’s logical to assume that the dominant flow in the coming weeks will be pound purchases. That could lead to quite a hefty rally."

Indeed, after sliding below 1.24 yesterday, sterling has already staged a modest rally overnight. Will it continue is unclear, but in a market in which the news leads to covering of excessive outlier spec positions, we tend to side with Cudmore on this one.

Here is his full note:

Brexit Trigger Is a Time for Traders to Glance Up

 

The day has finally arrived. Severe risks to the U.K. economy litter the path ahead, but this isn’t the time to trade on them. 

 

It’s always important to differentiate between asset pricing and the economic outlook. They are clearly connected but, importantly, any correlation is discrete in nature rather than continuous, and the lag is jumbled and inconsistent.

 

The U.K. economy keeps confounding the doom-mongers. It may continue to do so but, once Article 50 is triggered, it becomes very vulnerable to any hints of an acrimonious hard Brexit from the EU.

 

That must worry everyone who trades U.K.-related assets. However, it doesn’t mean they should sell upon the official trigger -- it means they probably did already as they’ve had months of warning.

 

This will be like knowing you’re going to be pushed off a cliff edge, preparing for the worst, and then landing on a ledge just below. It doesn’t mean you won’t ultimately plummet to your death, but there’s the relief of an unexpected opportunity to save yourself. You’d already fully prepared for the drop so this is a moment to instead consider if there’s any way back up rather than repeat your preparation for the fall.

 

The data shows that speculative sterling shorts are at a record. At some point, those positions have to be unwound. After Brexit is officially triggered, there are no other concrete dates on the horizon for bad news, so many shorts will be closed.

 

As a result, from Thursday, it’s logical to assume that the dominant flow in the coming weeks will be pound purchases. That could lead to quite a hefty rally.

 

This won’t be a sign from markets that Brexit will be wonderful. And, in fact, sterling appreciation would make the economic future even tougher.

 

There’s a perilous journey ahead but, at least for now, the potential path upwards deserves more consideration and focus than the downside option

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BigCumulusClouds's picture

Sterling will rally only if GB can rid itself of socialism and excessive military spending. That ain't gonna happen anytime soon. In fact it ain't gonna happen anywhere in the world until debt based currency systems are purged by civil uprisings. Debt based currency systems must have more debt in constant feedings or the currency collapses in deflationary oblivion. Economic truism.

Notveryamused's picture

No sh*t the pound will rally short term, classic sell(buy) the news type day. It's the peak negative news event & markets like greater certainty which today gives too.

JohnGaltUk's picture

Mr Mair was a patriot and there are others that are ready for the call.

RovingGrokster's picture

Socialism has to go.
Military spending should stay - what if the French were to go "nuclear" against the UK, or to play germ warfare with an airdrop of their smelliest cheeses?
Seriously, credible defense is always a good option to maintain.

DontGive's picture

Not buying this Brexit thing. Will believe it when I see it.

Countrybunkererd's picture

I never thought i would see the day where "Tear Down The Wall" was completely and utterly reversed. 

Ghordius's picture

actually, "Brexit Day" is not March 29th, 2017, it's March 29th, 2019

today, the only thing that really happens is that the clock starts ticking, for two years

but FX markets do not contemplate the future in two years, they are a bit more... short term

recently, a friend read a quip to me:

people that think in terms of millennia... build beautiful cathedrals. and don't care how many centuries you have to work on them

people that think in terms of the next quarter... well, they build ugly shopping malls

had to laugh and shake my head at the same time

Countrybunkererd's picture

and tear down the cathedrals for tax revenue shopping malls.  that are ironically now going down.

HenryKissingerChurchill's picture

people that think in terms of millennia... build beautiful cathedrals. and don't care how many centuries you have to work on them

people that think in terms of the next quarter... well, they build ugly shopping malls

nice lines

reminds me of Ludwig II of Bavaria... which had already planned the forthcoming constructions AFTER the Neuschwanstein Castle

Xredsx's picture

What will happen to the pound when the world realizes that the Euro is going to collapse? Then again, what will happen to th USD if the euro does indeed collapse?

Ghordius's picture

and what happens if the EUR does not collapse? or is that a question too far? one for which you get thrown out of...

...the temple of the faithful?

msamour's picture

Naw man!

 

Even McGyver can't hold this bitch up with bubble gum and paperclips...

RockySpears's picture

"What will happen to the pound"  Against what?

 

"what will happen to th USD"  Against what?

 

  Which currency do you want to pick as "The Winner"?

 

RS

HenryKissingerChurchill's picture

could the elders of usury somehow manage to PEG the pound to the Euro?

didn't the Swiss Franc got pegged with the €Uro for a time?

Last of the Middle Class's picture

After marking out hard lines on future payments to the European Union and the influence of EU law after Brexit, the text of the Prime Minister's letter is expected to offer some room for manoeuvre in negotiations.

This out of something called sky news. I got an idea how about you get no money, stay out of our laws and courts, we're a soverign state and if you cross into our borders again we'll mobilize the damn military. Tell Soros and his damn minions to stay the hell out. That's how you Brexit.

HenryKissingerChurchill's picture

we're a soverign state and if you cross into our borders again we'll mobilize the damn military. Tell Soros and his damn minions to stay the hell out. That's how you Brexit.

Soros is only a Rothschild minion... and the "citiy of london"™ is kind of the HQs for Rothschild.

you are not sovereign: Rothschild owns britain (kings and cattle included) since centuries (at least since 1825)

Swamp Yankee's picture

Three cheers for the Brits, they need some good news about now.

Paper Mache's picture

Its a great, great day.

I rang my 80 yr old mum this morning to sing 'happy Brexit day' to the tune of happy b'day.  She was in tears of joy. Said she could die happy now with less worries for her family.  The EU is a monster. They can all fuck off. Germany couldn't win 2 world wars, yet still managed to conquor all of Europe. 

But not Britain.  

The Scots can fuck off too, useless pieces of shite,  we've been propping them up way too much, for way too long. Gonna need a border wall ourselves. A 3 story addition to Hadrian's wall. They want independence, they can have it when England is ready, after we finalise leaving the EU. Then they can fuck off. But unfortunately, they probably won't secede because they need our money. 

Seahorse's picture

I logged in to upvote you.

BritBob's picture

Goodbye Brussels.

 

BritBob's picture

Fair to say that the majority of the people in Britain were happy to join an economic union with free trade, but not a political union. Who wants to be ruled by Brussels?

There is a trade imbalance in favour of the European Union so it is in the interest of the EU to make amicable arrangements with the United Kingdom. What's more, the UK can do its own trade deals on a one-to-one basis instead of having the EU to deal 27 member states before it makes a trade deal.

The UK will opt for a hard Brexit especially when one country (or part of a country in Belgium) can stall negotiations for so long. Spain could act in a similar fashion over Gibraltar and has the cheek to maintain its Gibraltar sovereignty claim. Claim?

Gibraltar - Some Relevant International Law: https://www.academia.edu/10575180/Gibraltar_-_Some_Relevant_Internationa...

So it looks like a quick hasta luego !

 

RockySpears's picture

"What's more, the UK can do its own trade deals on a one-to-one basis instead of having the EU to deal 27 member states before it makes a trade deal."

 

  Just to be clear, it can only do this with countries OUTSIDE the EU.  Withing the EU, all countries trade as a single entity.  We CANNOT do a deal with Poland, and a different deal with France, with different terms,

  RS

Ghordius's picture

perhaps you might see that as fair, but I find it too shallow for my tastes

actually, when the UK joined the outfit, it was not a free trade zone, and it was not called the EU. it was a political exercise

mainly, a sharing exercise. starting with "no wars because of resources" and a common agricultural policy (see CAP) and some cost-sharing "putting together" of expensive agencies, like regulatory agencies

then, you dear British Cousins asked for a rebate (which was fair, your agriculture is structured differently) and...

... for what today is called the "SM", the Single Market

so... yes, you Brits asked, we followed your lead, and today we have the EU Single Market, the EU Custom Union, the European Economic Area, etc. etc.

and your government will have to decide which of those sub-lets of the clubs it wants to stay in or leave

Paper Mache's picture

I hardly ever agree with you BritBob,  but for once I do. This tiny little Island is so productive and geared to trade. The EU has held us back. Fuck em, if they want to sell us their cars, and foodstuffs they better stop the threats. They will not work, and will cause us to entrench our position. The British have always faced bullies head on, and we always will.  Obama tried to bully us about Brexit. That was the deal breaker for me. After that I couldn't wait to vote out. 

Spain - Gibralter= tosh. What the Spanish really really need to do is continue exporting to UK, who is their third largest importer of their goods. They need us, we don't need them.   

buzzsaw99's picture

it only took the eu a short time to completely trash the euro while the ancient pound is still hanging in there at a buck and a quarter. that alone should tell you something about the prospects for the eu.

RovingGrokster's picture

Ah, yes, but the Euro never pretended to trade much higher than Parity, whereas the Pound was over 1.6 for most of the last 30 years, and was as high as $4 60 years ago.
Theresa May's leadership will have to exceed that of Thatcher in order to drive the Pound above 1.5 or so and stabilize it.

JohnGaltUk's picture

More socialism, less value in money.

You always end up with too many takers and not enough makers

RockySpears's picture

"Theresa May's leadership will have to exceed that of Thatcher"

 

  Not if the US carries on the way it is.

Or oil trades under different currencies.

 When no one NEEDS the $ to trade oil, who NEEDS the $?

 

RS

buzzsaw99's picture

Ah, yes, but the Euro never pretended to trade much higher than Parity...

wrong. https://finance.yahoo.com/quote/EURUSD=X/?p=EURUSD=X

Paper Mache's picture

Don't under estimate Theresa May. She is just as canny and hardnosed as Maggie Thatcher, just a little more refined. 

She's doing great so far.

south40_dreams's picture

Hope it's a fun day and Soros gets wiped out

Yen Cross's picture

  I think cable wil rise, but I also think the hoopla is priced in.

 Until the QE stops and the BOE brings their balance sheet under control, the pound will be on the anvil.

Lord Peter Pipsqueak's picture

You can check out, but you can never leave, I fully expect the UK's demands to be watered down over the coming years to the point where everyone says "great we're out - but nothing has changed", this will be accompanied by and driven by relentless selling of sterling to the point where the UK govt capitulates to all EU demands in order to take pressure off the curency, or in extremis, the globalists force the adoption of the Euro on the Uk government.

Mark Carney is already in place at the Bank of England, and any sane person who has listened to his utterances over the last few years knows that he is a total hostage to the housing market, and there are no circumstance or sequence of economic events that would lead him to raise interest rates, in fact in my opinion he more likely to cut again and restart QE, further depressing sterling.

Yes citizens of the UK you have won the battle, but will lose the war, globalists will ensure the outcome is painfull in the extreme.

 

Dien Bien Poo's picture

Talk about bullshit. YOURS IN SIZE.

inosent's picture

This is why longs aren't getting anywhere:

                     Long Short    

 

 

Commercial 7,115 67,165    

 

 

Lots of shorts with their big fat azzes smothering the bid. And after all this time - 6 months almost - still trading in the shadow of the 45 second spike from (futures anyway) 126 to 120. It's like the new thing. Splat and trade flat - for months (GBP) and now years (Euro: 2014 - ???).

The stock market isn't helping much, bcz it sucks a lotta cash into it, apparently plenty of international capital flooded into US markets.

The fed is raising rates.

And an epic political divorce.

So, there the sellers sit. And they won't move unless forced into it. The only player that can do that is the central banks, which, actually, might be lurking in the shadows underneath these prices. That isn't mom and pop thwarting sellers from getting anywhere for the last 5 months (after the October melt).

#LastManStanding