David Morrison  |  10/12/2018 09:03
Brexit Vote; Is it End or Just the Beginning ?
 
After five days of intense debate, on Tuesday the UK Parliament will vote on the withdrawal bill negotiated between the United Kingdom and the European Union.
 
The EU has already voted to accept Theresa May’s Brexit bill - but now it’s decision time for the UK and Northern Ireland.
 
Looking at the odds currently being offered by bookmakers, the probability is that the Prime Minister will lose the vote. Paddy Power is offering odds of just 1 to 14 on a No vote while YES comes in at 11 to 2. So it would seem the only issue now is how many MPs come out against Mrs May’s proposal. A large majority will put her premiership at risk.
 
 
 
PaddyPower Odds
 
While a ‘’NO’’ vote is seen as a done deal, large speculators in the sterling-dollar futures market continue to reduce their short positions. In late September speculators were net short of 80,000 futures contracts while latest data shows only 39,000 net shorts. This tells us two things:
 
  • Firstly, large speculators consider current levels as good areas to cover their shorts.
  • And secondly, there’s room for further short selling after the vote.
 Large Speculators GBPUSD Futures Net Positions
 
One thing seems certain and that is we can expect a pick-up in volatility in sterling. Having said that, we’re unlikely to see the kind of wide intra-day ranges that came after the Brexit referandum in 2016, unless Mrs May surprises everyone and wins Tuesday’s vote.
 
Stock market volatility shot higher last week as we experienced huge swings in global indices. Trade tensions between US and China have escalated again after being dampened down in the immediate aftermath of G20. In addition, concerns over a slowdown in global economic activity has led US fixed income traders to price out some of the rate hikes forecast for 2019. However, the market still expects the Fed to raise rates next week by 25 basis points.
 
 
Yields vs Dollar
 
This chart shows the US 10 year yield in blue and Bloomberg Dollar Index in yellow. There has been a good correlation between these two since the beginning of year. However, we are now in a phase where rising bond prices and the corresponding decline in yields require US dollar funding that creates this temporary decoupling. If we see bonds reverse and once the uncertainty over Brexit has passed then we could see the Dollar Index sell off sharply to recouple with US yields.
 
On the economic calendar we have US PPI on Tuesday and CPI on Wednesday. We also have monetary policy meetings from the European Central Bank and Swiss National Bank on Thursday. Neither central bank is expected to move on rates, but traders expect the ECB’s Mario Draghi to announce the termination of the Asset Purchase Programme.
 
Have a great week!
 

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