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GBP has continued to outperform against the backdrop of two key unfolding events—how the Supreme Court ruled on the legality of the prorogation of Parliament and whether a deal is possible by October 31st. In both the cases, bears cautiously watching in the coming days.
Trumpian Johnson further dims prospect of a Brexit deal. The resumption of Parliament in the recent past was a truly unedifying spectacle with Prime Minister Johnson's behaviour offensive in every sense. He and his cabinet were dismissive of the Supreme Court, which earlier in the week ruled his advice to the Queen as unlawful. And they were belligerent, economical with the truth, and calculatingly provocative when responding to charges across a range of issues, from the Government's forced publication of its damning assessment of the likely severe damage to be caused by a no-deal Brexit, to questions of impropriety related to his recently uncovered actions as London Mayor.
On the second issue of a deal by October 31st, Juncker’s comments on this being possible were viewed positively by the market but our view has been that tight timeframe makes this highly unlikely. For a deal to be reached by October 31st, a number of developments have to occur in quick succession. The UK has suggest a suitable alternative to the Irish backstop, which would require the DUP being prepared to accept broad regulatory alignment with the EU which is not just limited to the agri-foods sector, following which issues around on duties/ tariffs between Northern Ireland and the rest of UK will need to be addressed and a mandate to redraft Withdrawal Treaty would have to occur.
At this juncture, even the first step is on shaky ground as the DUP has not shown yet shown any signs to be amenable to regulatory alignment. Against this backdrop, the odds of a deal by October 31st remains very low in our view. The DUP response will thus be the key issue to watch in the coming days, as will be the meetings between the PM and EU leaders at the UN General Assembly next week.
Now, the scepticism on the potential to reach a deal by the end of October and the current polls keep us bearish on GBP which we express via a limited loss GBPUSD put spread. The put spread is admittedly close to expiry and our bias is to reset shorts, but we refrain from doing so now given the near term uncertainty around the Supreme Court decision as well as positive news momentum and still short GBP positioning. We will continue to monitor the developments in polls and restructure the trade as required in the coming weeks.
Hence, we activated GBPUSD shorts via optionality at the beginning of August, for now, we wish to maintain same short positions via 30d/10d (1.25/1.1950) bear put spread (spot reference: 1.2305 levels). Courtesy: JPM
