Jaded Pound Analysts Are Unconvinced by Latest Brexit Deadline

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When it comes to Brexit trade deal deadlines, talk is cheap. That’s the view of an increasing number of currency strategists after negotiators again pushed back the cutoff point for talks, this time untilSunday.

RBC Europe Ltd., Nomura International Plc and Standard Bank are focusing instead on Dec. 31 when the Brexit transition period officially ends, and there’s even speculation at banks about an informal extension into 2021 amid sputtering political progress.

“Presumably the deadlines are a bluff by each side to get the other to cave in,” said Steven Barrow, Standard Bank’s head of foreign-exchange strategy, though “you don’t want to be left with a large short in sterling if one of these deadlines turns out to be real.”

And the clock really is ticking this time. Talks could collapse or succeed this weekend to trigger outsized moves in the pound. U.K. Prime Minister Boris Johnson has warned of a “strong possibility” of a no-deal outcome. Options traders are positioning for increased turbulence in sterling, with the cost of hedging swings in sterling over the coming week near a seven-month high.

Brexit has long been a headache for strategists as each political development dragged sterling in its wake, with several summits and lawmakers’ votes over the years doing little to change the bigger picture. The pound fell as much as 0.8% as of 9:17 a.m. on Friday to $1.3185.

“Any notion of a time line is increasingly unreliable and we wouldn’t be surprised if talks drag on into next week,” said Adam Pickett, a foreign-exchange strategist at Citigroup Global Markets Ltd. in London. He still sees an 80% chance of a “bare-bones” deal by year-end that could lift the pound to around $1.40.

Worthless Options

Options traders have grown used to piling up Brexit hedges and are taking similar positions this week. The relative premium to hedge against sterling losses over a three-week period — currently covering year-end — is hovering near itshighest since the aftermath of the 2016 Brexit referendum. That cost is the highest among Group-of-10 currencies.

“A lot of premium has been spent on pound hedges for lots of deadlines over four to five years that never amounted to anything,” said Jordan Rochester, a strategist at Nomura International Plc. Take last November — investors preparing for a Halloween shock after a Brexit deadline placed billions of pounds in options, most of whichexpired worthless.

Attention is now turning to New Year’s Eve, when Britain’s transition period to cushion its departure from the European Union will expire. Without a deal, Britain will trade under World Trade Organization rules and sterling could fall to $1.25 by mid-2021, according to a Bloomberg survey.

Not everyone is skeptical about the latest deadline. The timeframe can’t be stretched indefinitely and European politicians have indicated they don’t want to work through Christmas, said Jane Foley, Rabobank’s head of foreign exchange strategy. At Monex Europe, foreign-exchange market analyst Olivia Alvarez Mendez says deadlines “are hardly to be trusted,” but still sees a deal as the more likely outcome.

Yet there are those who question how definite even the year-end cutoff point really is. Standard Bank’s Barrow predicts a deal and says the transition period may need to be extended, which could see the pound edge up to around $1.35 within a day.

RBC Europe’s head of currency strategy, Adam Cole, said the two sides might reach a temporary arrangement to extend the transition. By that point the pound would be rallying, and it may be time for investors to jump ship.

“Our advice would be to sell into the rally on the grounds that there will be significant disruption, even with a deal,” he said.

— With assistance by Vassilis Karamanis

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