FxWirePro: Deploy GBP/CAD/JPY RV trades on Brexit and USMCA developments

Brexit deal still weighs on Sterling: We are upgrading our near-term GBP forecasts by around 2% to bring them closer into line with the central scenario of a negotiated Brexit. It’s not that we have changed our assessment of the probabilities of the various Brexit outcomes (we still put this at 60:20:20 for deal, no-deal and no-Brexit), rather that the market seems more willing to shift GBP pricing to reflect the central scenario instead of a probability-weighted average of the individual scenarios.

NAFTA turns USMCA: The US and Canadian authorities managed to iron out their differences and pave the way for Canada to join the preliminary trade agreement reached by Mexico and the US a month earlier, and meeting a soft deadline to deliver the legal text for a tripartite deal by Oct 1. This effectively paves the way for the successful realization of a renegotiated modernized NAFTA, which will now be called the US- Mexico-Canada Agreement (USMCA). Negotiations were successful as both sides compromised on long standing and at times seemingly intractable issues, with the US agreeing to largely keep the important trade dispute resolution mechanisms embedded in NAFTA’s Chapter 19 (now Chapter 10 in the new agreement) intact while Canada agreed to grant the US partial access to its dairy market. 

While the macro impact of what has exactly changed from legacy NAFTA to USMCA may be less material, the act of striking a deal has broad, material implications for markets, given the degree to which it reduces uncertainty around the tail risk scenario of a regime collapse of such a large trading region. 

The BoC and the BoE appear to be looking to normalize monetary policy, but experiencing similar difficulties. Both are involved in uncertain trade discussions that are weighing on investment and both have seen a softer patch of data than the market originally expected. Given it strips out the USD component and has similar risks to the front-end pricing, perhaps GBPCAD is an RV trade worth considering. 

The sterling on NEER basis has been wedged into an unusually tight range, not so much owing to an absence of developments, especially on the Brexit front, more that investors just don't know what to make of these, either for the end-game to Brexit or the remainder of the process. This inability to see through the Brexit fog means that GBP trade-weighted has not budged from a month ago; it’s also within half a pct of the average since the referendum.

Buy 1M 25D GBPJPY put, sell GBPJPY call vs buy GBPCAD call, sell GBPCAD put (delta-hedged), vega neutral notionals. Courtesy: JPM

Currency Strength Index: FxWirePro's hourly GBP spot index is at shy above 72 levels (which is bullish), while hourly CAD spot index is edging higher at 36 levels (bullish), while articulating (at 11:41 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex