European Union Brexit negotiator Barnier indicated a willingness from the EU side to agree to a Brexit deal that offers unprecedented relationship with the union, a new turn that caught sterling shorts unaware after a grinding and ominous uncertainty had built in recent weeks. The sterling rally went nearly vertical for a few hours until Barnier later made it clear that the EU side is preparing for the eventuality of a no-deal Brexit as well.
Specifics on the nature of the deal are absent, but we may be a bit wiser ahead of the weekend as the UK’s Brexit secretary Raab will head to Brussels tomorrow for more negotiations. Traders might consider positioning for a binary Brexit outcome in options to avoid extreme short-term moves on headline risk – often, as with the Brexit vote itself, spreads can offer surprising risk/reward in these situations as implied volatilities for the deeper out of the money leg of the option structure can be quite high.
The difficulty is one of timing – when do we know which way the chips will fall?
Elsewhere, USDJPY jumped higher through local resistance (see below) as US yields have drifted back higher while equity markets have been on a strong run higher and the EURUSD consolidation has been shallow indeed as the pair quickly bounced back to the 1.1700 area after yesterday’s dip.
Don’t look now, but the Turkish lira is under strong renewed pressure, falling all the way to the 6.70 area as of this writing, and other EMs are also on the defensive even as the USD picture is mixed at best and China has kept the renminbi supported (though slowly slipping back lower it seems.). It all feels rather nervy and uncertain, which could mean the USD remains supported here. Chart: USDJPY
USDJPY had a go through the local resistance and the top of the Ichimoku daily cloud. As I discussed in yesterday’s FX Update Webinar
, the move looks technically interesting but we need to see global bond yields coming to life for a sustained move beyond the highs for the cycle around 113.00. And if risk appetite swoons here, the JPY starts to play a safe haven role and could even outperform a strong USD, keeping this pair thoroughly rangebound and boring.