Sterling keeps even keel despite fresh Brexit chaos

Yesterday, UK house speaker John Bercow threw a spanner in the works by moving to block another vote on May’s Brexit deal, invoking a rule that was last used 99 years ago that says that it is not permissible to vote twice on unchanged measures in the same parliamentary session.

Some are calling the situation a constitutional crisis and the potential course of events from here has only multiplied further, though immediate clarity on a third vote on May’s deal looks far less likely today or tomorrow unless May’s side can find a way around Bercow’s move – having the Queen dissolve parliament and then calling a new session, as some have suggested is a possibility, looks a stretch at best.

Stay tuned – if no vote can be held, May’s task will be to appeal for a delay at the EU summit starting on Thursday and whether this is a short delay to rework the deal or a longer delay that sees the UK participating in EU elections and even leads to a UK elections and even a second referendum, etc.

Elsewhere, the most prominent theme is strong risk appetite on the strong assumption that the Fed is set to roll out a schedule for the unwinding of its QT programme and a dovish adjustment of Fed rate forecasts to cement its January guidance that it would now be “patient” before increasing rates further. The market is no doubt hoping to get a specific schedule for the cessation of Fed asset sales, but the overarching question is first: will the Fed deliver and second: even if it does, has the market overpriced the implications and . Another factor that has faded into the background is the status of US-China trade negotiations, where the latest guidance came from the South China Morning Post that Xi and Trump may not sit down to sign a deal until the June timeframe.

Trading interest

Shorting EURNOK still a theme, prefer looking for selling upticks with half a position ahead of Thursday’s Norges Bank meeting. 9.70+ providing compelling entry levels.

We’ll sit on our hands on the US dollar – tempting, however, to consider medium-dated options for USD upside, just in case the market’s complacency on the Fed delivering a strong dovish message tomorrow proves unfounded. Something like a 1-month AUDUSD put, strike 0.7000. 

Chart: AUDUSD

AUDUSD pulled away from a recent attempt to break support, but bulls have by no means shown up in force. The bears may get the upper hand again if the Fed fails to deliver as dovishly as the market hopes or if the market has simply over-anticipated the event. Certainly, implied volatility in the options market is so low that placing a 1- to 2-month directional trade in either direction is historically cheap, for example a 0.7000 put or a 0.7200 call. The risk from such a stance, of course, is that we get precisely the message from the Fed we were expecting and traders remain unwilling to take directional bets as long as we are awaiting a US-China trade deal, which may not move forward until June.