No-Deal Brexit: Implications for GBP

Okay, very good afternoon. Thank you for joining us. It's Friday the 11th of December. I am joined by our Head of Trading, Piers. Afternoon, Piers.

Hi guys. Hi.

And, uh, if you are not familiar with Amplify, I'm Anthony Cheung, the Head of Market Analysis here, and I kind of oversee Amplify Live, the trader hub, which is our kind of main portal where we house all of our community. But straight to business, there's been a lot of headline noise in regard to Brexit this week. So very quickly to catch up, there's been a lot of expectation of continuous rollover of deadlines to be met in terms of deal or no deal for Brexit. We missed a big one on Wednesday this week. The pound, just a bit of context, is off roughly about 3% from where we were at the beginning of the month. And in regards to money markets now, they're pricing in— I saw this morning, Piers, just going to turn my scorecard off— money markets are now pricing in the probability of a 10 basis point cut of interest rates at the Bank of England by March 2021, 65%, and it was 16% at the start of the month. So as we're kind of closing in As most people will know, the end of transition is the end of the month. That clock is quickly running out, and yet we're still seemingly stuck. Although some agreements loosely on things like Northern Ireland and, and so on, and also pulling back a little bit on the whole Internal Market Bill legislation, the three main sticking points still persist. Now, to give this discussion some direction, I want to avert going into any of the political reasons of why most people are probably still of the opinion of why there is going to be a deal and what this could lead to and the positioning and leveraging and why. I just want to focus more on the actual trade implications of how do we tackle and focusing predominantly on the next 3 weeks, so the here and now. So with that being said, then, I'm just quite keen to hear what you have to say on your view on this new deadline that European officials and UK have been quite explicit to say as of today, where the pound has weakened again, that Sunday is the last opportunity. What do you think?

I think that's highly comical. I mean, we've had about 500 last opportunities already. So do I think this Sunday is the last opportunity? Firstly, no. Do I think that this Sunday they're going to do a deal because they have to because it's the last opportunity? I think definitely not. And I think it rolls on into next week and it rolls on to the week after and it rolls on to the week after. And really, the big deadline is the 31st of December at midnight. And actually, even then, I mean, I'm not sure we'll have time to get into it on this call, but I think it will roll on into next year.

Oh, really?

Yeah.

OK. Just very briefly, I was reading a little bit about that because the moment, I think a few weeks ago, a European official came out and said, look, we can squeeze in a last-minute meeting of officials, European heads, on the 28th of December. I was kind of convinced then, well, that all the rest is noise till that point.

That is in your calendar, that is going to happen.

But in an extreme scenario, what I've read is that the European Council could in theory agree to a provisional application of any degree deal, would allow parts or all of it to kick in. Before then European Parliament actually votes on it. But as you say, there's— of course we're opening a bit of a can of worms. But yeah, I think your phrase there is exactly right. Of course they can buy more time. Yeah, I mean, that's the end. And that probably supports the notion then— I mean, pound, um, on a chart, I'm going to bring it up on a daily, and you can see some annotations on that chart. Okay, does that explain then why, although we've pulled back obviously this week The market is still relatively high.

The market is still relatively high because of the fact that anybody who tracks these Brexit developments and obviously the trading community, well, they'd be classified as an entity that tracks these Brexit developments. Well, then no one, no one, no one, no one should be surprised with what's going on in terms of we're still at the negotiating table and we're still coming away from these negotiating set-piece events and are there still a big gap and there's still a big divide. I mean, this is how it goes, right? And I'd say that therefore we're trading up. I know we've come off today and perhaps a bit more broadly this week, but don't forget that last week you can see there on your chart, last week we were trading and testing and indeed making the highest levels on cable that we've seen since this quarter 2 of 2018. Now, I know there's dollar weakness in the mix here, but nevertheless, you know, the The pound right now, as it stands, is not pricing in a disastrous economic cliff edge on the 31st of December. And I'd say there's two broad reasons why it's not. Number one is what I've just said, in that I don't think genuinely people have been expecting a deal to be done yet. Okay. I think there's still three weeks, right? So it'll go to the wire. And as I said, stuff. They can change stuff. They can go in, they can post, but they can bump this into next year if they want. But that's one reason. I don't think necessarily no deal at this point is a huge surprise. I actually think the much bigger reason, and I don't think it's been getting much coverage, and I think it deserves more, and I think that actually, is this a big deal anymore? Perhaps the use of the word deal there is the wrong one— is this a big thing anymore? And what I mean by that is relative to COVID-19, the potential impact on the UK economy from a deal or no deal Brexit is actually now quite small. I mean, they're talking about worst-case scenario, some of the forecasts for next year is that GDP might drop, but might be 2% worse off in the UK from a no deal. But Brexit, COVID-19, well, that had a 26% impact on GDP. And we're going to see a recovery from that next year. And so deal or no deal, COVID is easily the biggest play in town when it comes to thinking about how the UK economy is going to perform, thinking about how the Bank of England and the UK government might behave from a policy point of view, and therefore thinking about how the value of Sterling might respond. So that, that's one thing. The other thing on the why is this not such a big event anymore in my mind is because so much has changed since 2016. So much has actually developed and evolved. For starters, if you go back to 2016, the deal that we're hoping to get negotiated is actually a relatively hard Brexit. And that's because we're talking about leaving the single market and the customs union, right? If you go back to 2016, that was, that was right up on the hard Brexit end of the spectrum. But actually, that's now the deal that's trying to be brokered, right?

Number one.

Number two, a lot's been decided already. I mean, you know, there's lots of, you know, like financial services equivalence has been granted for 2021. I don't know if you saw in the news earlier this week, but the UK have just negotiated a trade deal with Singapore. And actually, behind the scenes, what's been going on as this thing's been kicked down the road and kicked down the road and kicked down the road, we've actually been able to now negotiate trade agreements with countries outside of the EU. Obviously not with the EU, but countries outside of the EU. And so that just reduces the kind of negative impact. And so in my mind, why is sterling not really reacting yet? I'm not sure, I'm not sure it necessarily will react. Well, can I share my screen and show you my chart? Because let me qualify that, I think it can react, don't get me wrong. I think there is volatility to come in the weeks ahead. But I want to get, I want to quantify what I think the volatility might look like. Now on this chart, I've got a weekly chart of cable, so we can just prick pick out the— on the very left-hand side, the actual Brexit vote announcement and the collapse. Let me just draw up some lines here because it feels like such a long time ago now, but we did hit 150 on the day of the Brexit vote itself. And then the kind of— let's call it the double bottom of the aftermath was right down at, let's just say, the 120 handle. And we had some key support here in the summer of 2019. Okay, really important that we bounced off that. Then obviously COVID created created this violent situation back in March. So let's kind of just discount that for a moment, although I will draw a line here because this is important. What's happened over the last few weeks is we've driven up and we've tested this really important handle at 135, which was the 2019 high, reconfirmed August 2020. OK, and now we're dropping because, yeah, all right, the 31st of December deadline is now nearer. And it doesn't yet feel like the two sides are coming together at a sufficient speed to get an agreement in place by the end of the year. Okay, so I think you're just seeing this week the pound drop from what's been actually a really elevated level. So even though we've dropped off a few hundred pips here, we're still trading very much right up in the top quartile of the range that we've seen this currency pair trade for the last 2 years. So even though we're selling off now, the pound's still relatively high. Now, some of that is because of a weak dollar, I get it. But where can the pound go here? And I think there's 2 scenarios. We either get a deal, okay, but bear in mind that's still quite a hard Brexit. We either get a deal, and what happens there? I can still see the pound devaluing off the back of a deal. But just not by very much. I think if we get no— the worst-case scenario where it's an acrimonious, fractious, acrimonious trend in these talks into year-end to the point where both sides throw their toys out the pram and storm off home, that's the worst-case scenario, right? And that's like your 2.5% hit to GDP next year. So here, obviously, the pound is going to drop. And I'd say the 115 handle is what everyone's eyeing up as a potential possible worst-case scenario biggest move. And that's that low point that we had. That's the COVID low, if you like. There's a big support of 120 before we get there, which is that historical low from the Brexit negotiations in the 2019— summer 2019. So 120 is massive, and then 115. And so I would say acrimonious breakup of talks at the end of this year, and you're going to get the pound down to 115. Now, how quickly does that happen? Well, it depends. That can happen over the next few weeks. Obviously, we're tracking how the negotiations go. Look, don't get me wrong, we could get a deal on Sunday, right? But I think the chances are small, so they'll kick the talks into next week, and it's like how far apart are the sides, and is there any sign of those— that division reducing. And that division has reduced this week, just not by as much as people were hoping, right? But the two sides have inched together. And so as long as that continues over the next few weeks where there's at least an inching together, then I think the pound is going to be you might see more mild negativity down to the 130 handle. Now, if in the next few weeks, what happened this week where we've had a mild move together, if that actually now backtracks, well, fine, the pound is going to get impacted more violently. And we're going to get break at 130. And key levels like 126.79 was the summer low. And that was kind of key resistance area through quarter 2 and quarter 3— sorry, yeah, Q2 and Q3. So you might get a move down to 1.2679 if the progress— the small progress made this week unravels next week. And so that's it. It's about the direction of travel of these talks. And are they, are they making small concessions at the very least, even though we still might be a decent distance apart? And as long as there's continued small concessions, then I don't think the pound is going to get much below 1.30. If we reverse, then we're down 126.79, then we're down to 120. But that— the only way we're going to get to 120 in the next 2 weeks is if the talks really take a turn for the worse, which I don't think they will. I think then the 31st of December becomes your line in the sand, and at that point, yeah, either they agree an uncooperative no deal and fine, then you're going to get the pound down to 1.15 and maybe even below. Or they come up with a cooperative deal, and I think the pound hangs around 1.25, and maybe between the 1.25, 1.30 channel. It depends what happens with the US dollar, perhaps, as to where it kind of goes from there. You're on mute.

So just to jump in there is I mean, look, that gives a great reference point for, for that, as we've discussed, the period of, uh, of the next 3 weeks and perhaps even beyond. Um, but within the community, there's a lot of the guys on Amplify Live who are trading, day trading.

Yeah.

Now, having obviously, you know, day traded for many years yourself, in this type of situation, say like, for instance, And there's been a day this week when sterling's down 200+ pips. It's down 117 as we talk at the moment. What's your kind of advice around execution in a headline noisy environment, risk managing in that environment? How would you go about approaching that?

So it's really like when we're getting— when we're coming towards a deadline, then volatility increases. Now that just means you've got to be savvy to that, and you've got to understand that the risks involved with you trading go up as volatility increases. And therefore, on the one hand, profit expectations rise, because when you're getting into trades, you know, you're not looking for 25 pips, you might be looking for 100 pips in a trade, okay? And so be careful there, because often people don't quite talk about the profitability side of volatility. Because one, one trap a lot of people will fall into is they get a good trade on and they take it off for 25 pips, only to then see the thing move another 75. Now you made money, but you feel like you've lost all that profit that perhaps your trade deserved. And then this can kind of trigger a very negative reaction where you then try and make up for that lost profit by gunning back in and expecting— irrationally expecting another 100 pips, and then you get chopped up and it gets messy. So you end up losing money because you took that first trade off for a profit too early. So do understand that your profit expectations should increase, but then on the risk side, you've got to be— you still got to risk manage yourself very tightly. You know, it's key to not lose discipline If you're in a trade that's going wrong, you've got to be super disciplined because in the end, any one of these trades could be a massive few hundred pip move that could absolutely kill you. So you've definitely got to be super disciplined. Um, then it's about headline risk and it's about technicals. And so it's about understanding where can I get my— where, where, you know, where can I get my ear to the ground Is it whatever, Laura Koonsberg on Twitter, or is it Anthony Cheung in The Hub, for example? And it's about getting the news first, or at least in that first wave, and it's understanding that, right, where are my technicals? How far can this market move? And actually being aggressive with getting on it. It's about if you— and this is that difficulty with differentiating news, what's important and what's not. It's understanding the one that's important, and it's understanding, right, that's going to trigger the move. I am going to be on and trade that. And then it's about just simple— I think keep the technicals quite simple in this case, because it's in the end a macro-driven environment. So I'm just marking up big support and resistance levels like I've got on my chart here. And like this morning, it's like firstly aiming for that low from the day before, and then it's obviously recognizing the low of the week and then making that judgment that right, this news is significant enough, I expect a break of these levels. And then of course, we're now down into a bit of new territory. If I just extend my chart out a little bit, because then we're looking at price points like back here, which was the key resistance and support. And so we're down around there. And then you're thinking about the big handles and so on. But it's definitely about headline risk and about understanding where to get the news from, understanding which item is the significant one to pull the trigger on. It's about having larger profit expectations but still being disciplined with risk.

Yeah, and just to kind of add to that point from, from my side of things, given, um, what I do, which is news aggregation if you like, and my job is then to assist in that area. And that's a couple of, uh, questions I normally get in that regard is kind of you know, and, you know, why don't you trade? You know all this stuff, you've always got your finger on the pulse. The idea is to have my finger that on the pulse requires me to be 110% focused on the matter at hand to, to then help capture that information, hopefully in a timely enough fashion where someone like Piers or the rest of the community can then take advantage of it, or at least do that that digging around or lateral thinking about trying to find other ways of where news could come from outside of the standard kind of financial newswires. And that's one of the final points I wanted to say, was that with a subject like Brexit, you need to understand that it's a political thing that we're monitoring. And so therefore, financial newswires like Bloomberg or Reuters, as expensive as they are, they're terrible at reporting this type of information. It's just not their bread and butter. The information on Brexit, as it has done since 2016, comes from journalists who communicate in real time via Twitter. And so that's where, you know, say this weekend, for example, if you go right under the microscope, obviously a lot of traders will look at how do we open on Sunday night in electronic trade, for example. So given we're likely to hear most likely they've not made any progress on this newly committed deadline, as soft as it might be, on Sunday. There could be a gap in prices. So all of that information will emerge from these alternate sources, and certainly that's where I think that, you know, we can obviously give advantage to our guys and hopefully the community at Amplify Live. But I'm going to, um, I'm going to stop the recording if you're watching this on YouTube after it's taken place, we're going to then continue now a full Q&A. There's been a number of questions coming in from the, from the guys in the Amplify Live hub, so we're going to tackle all of those now. We'll stay on, but if you'd like to check that out, then remember to check out the link in the description below if you want to get access to the full recording. Thanks, Sriraj.

Thanks.