Sterling surges on Brexit hopes, but risks remain

Sterling remains rather bid after the EU Brexit negotiator Barnier said yesterday that a Brexit deal should be possible within an eight-week timeframe. The assumption is that the two negotiating sides will agree on some version of a Brexit deal along the lines of the Chequers proposal hammered out at a UK Conservative party leadership powwow over the summer. But as former foreign secretary William Hague points out in an op-ed in the Telegraph, there is a strong risk of a constitutional crisis if a sufficiently large Conservative party revolt of Brexit hardliners who believe a Chequers-like deal provides insufficient sovereignty for the UK requires a large number of Labour MP’s to vote in favour of the deal. 

In other words, risks remain, and sterling may have a hard time sustaining directional momentum for any length of time until the situation clears... or not.

It seems the euro has caught some of the positive contagion from the apparently higher probability for a Brexit breakthrough and traders shouldn’t focus too much on EURUSD and GBPUSD for a general picture of the USD direction at the moment, as USDJPY trades to new strong three-day highs this morning.

Emerging market currencies are generally firmer despite the grind higher in USDCNY and weakness in EM equity markets, seemingly led by Chinese equities. But the Russian ruble was in for a rough ride yesterday as USDRUB extended above 70.00 for a time after a top economic aide in the Russian government spoke out against rate hikes after last week saw Russian central bank governor Nabiullina indicating a bias for a rate hike. 

This is a classic no-no for EM investors smelling a rat in the political authorities meddling with the central bank’s independence. As well, the geopolitical risks linked to the possible coming conflict in Idlib and the potential additional US sanctions are weighing. Russian credit spreads on USD-denominated debt have not yet stretched to new highs for the cycle, it should be noted, unlike the case for South Africa foreign currency debt.

Chart: GBPCHF

Promising developments in Brexit negotiations and a delayed reaction to the recent steep retreat in Italy’s yields has inspired a sharp move higher in GBPCHF and there is considerable further room to run to the upside if a Brexit deal materializes after the brutal 10% move lower from the top earlier this year. Tactically, however, sterling could be in for a rough ride on further headline risk indicating the progress toward a deal is in doubt.