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Negotiations between the UK and EU seem to have progressed in recent times. A combined message from both Brexit Secretary Davis and EU chief negotiator Barnier indicated both blocs had broadly agreed to a post-Brexit transition period, running until December-2020. This is deemed as quite a positive move by the FX markets, with GBP finding good support.
For now, we have stepped out of shorts in sterling crosses, especially GBPCHF as we don't want to buck the trend since last week when transition deal optimism began to swell, but continue to hold onto a long EURGBP vol swap on the rationale that this week’s Irish fudge simply delays difficult negotiations down the line and could descend into brinkmanship as the agreement deadline nears.
Volatility rather than direction is the more natural expression for the tortuous path that Brexit talks are likely to take.
GBPCHF rallied 1% on the week after agreement on a Brexit transition deal with the EU that will apply through end-2020 and allow talks to move on to the next stage of discussing terms of a trade agreement.
There was some concern that the thorny question of the Irish border could once again scupper a deal despite positive media reports of behind-the-scenes progress: it had appeared the EU was going to demand significant movement from the UK side if transition was to be agreed, but in the event, the EU chose not to force the issue and the relief for GBP was profound.
Uphold a EURGBP 1Y vol swap at 8.85% Nov 21, 2017. Marked at -1.76%.
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