Trigger Happy

ARTICLE 50 - There has been a lot of talk Article 50 could be triggered imminently, with some reports calling for today as the day. Naturally, when the UK puts the EU on official notice of its intent to exit, a lot of the fear and uncertainty will come rushing back. There are so many unanswered questions relating to Brexit that will need to be addressed sooner than later so that we can have a better handle on how it will all play out. What will happen to EU citizens living in the UK or who now wish to live in the UK? How will the UK make out if it leaves the single market? What type of new trade deals will there be? How will all of this impact London's status as a major financial center? Will Brexit significantly reduce capital flow into the UK? And the list goes on and on. Perhaps one of the most concerning issues is the threat of a breakup of the UK. Many associate this risk with another Scotland referendum, but the reestablishment of borders in Northern Ireland with the Republic is also a frightening prospect for the UK.

PRICED - And so while I'd be surprised if we didn't see a drop in the Pound once Article 50 triggers and perhaps even in the days that follow, I also don't believe we see the Pound substantially lower than what we've already seen. Why? The easy answer is that all of these big uncertainties and unanswered questions were already anticipated and priced ahead of the EU Referendum. While most believed Brexit wouldn't happen, this didn't change the fact that the downside risk in the event of Brexit still needed to be properly assessed. And back then, when the Cable rate was trading in the 1.4000s, the assessment was that a hard Brexit would open a drop into the 1.1500-1.2000 area. So when you remember this fact and consider that we've already traded into as low as the 1.1800s back in October, it would seem that this analysis did a good job pricing the risk and any additional setbacks should be limited. I wouldn't rule out a drop even below 1.1840 and towards 1.1500, but I also think the time has come to look to buy.

STRATEGY - I have highlighted this view both fundamentally and technically in recent weeks and will be looking to capitalize on this trade. Now the trade may come by way of buying GBPUSD on a dip or selling EURGBP into a rally or even both. We just have to wait and see how things play out in the days ahead. But the key takeaway here right now is to fully expect the very real possibility the Pound sees one more intense decline as Article 50 is triggered, before it starts to finally stabilize and begin the process of bottoming out. I would be very surprised to see a scenario where Article 50 is triggered and the market is excited about buying Pounds. But the reality is that just as I highlighted with the Euro on Monday, markets ultimately play the rumors and then exit trades once those rumors become fact. So effectively, the market has sold the Pound in anticipation of the triggering of Article 50 and once this is officially put into play, the Pound should actually become more attractive than not on the fact. But again, given the weight of the event, it may just take a little more time with this one before the market starts buying the fact. I am looking forward to the opportunity to buy Sterling and we'll see if something sets up as soon as this week.