Brexit’s end-game
By Peter Rosenstreich
Tomorrow Tuesday European Union ministers of European affairs will meet to discuss extending Brexit’s deadline beyond 29 March. Meanwhile, the UK government will for the third time try to pass its ‘deal’ through Parliament. If it passes, the government will ask for an extension to 30 June. If not, a frenzied scramble will start to find acceptable model prior to 29 March. Markets are pricing the deal to pass and the extension to be granted. One month implied volatility on GBP is subdued well off recent highs. EUR/GBP is trading just off one-year lows. Gilts continue to track lower as well.
Traders should remain vigilant in an environment politically charged and fluid. EUR/CHF might be a smarter play. EUR/CHF has been the barometer for Euro-centric risk and the pair still brings a Brexit risk premium (with a weak EU economy, Italian budget and dovish ECB risk). As probability for a UK crash-out fades, investors will reallocate from CHF back into Euro. The SNB will provide no barrier to EUR/CHF strength, giving EUR/CHF upside plenty of space.
Dollar slides ahead of Fed meeting
By Arnaud Masset
Since 8 March the greenback has traded downward. The dollar index, which tracks the performance of the US dollar against a basket of its peers, lost more 1.30% in the days following the European Central Bank meeting, featuring ECB President Mario Draghi’s infamous dovish speech. Monday morning the mood was no different in the FX market, USD continued to retreat against the single currency with EUR/USD hitting 1.1351, its highest level since 4 March. Only the pound sterling was losing ground, thanks uncertainty stemming from Brexit.
Investors anticipate the US Federal Reserve maintaining its dovish stance, and therefore continue to load on equities. We believe the market is under-pricing a potential, massive downside revision to economic forecasts. The Fed will release an updated version of its forecast, and given the lacklustre economic data published since its December meeting, it won’t be pretty. We anticipate equities and the buck will suffer this week, as investors will price in slower economic growth and weaker inflation.