A “Clean And Hard” Pounding: Complete Recap Of Pound’s Rough Day

As expected, all anyone cares about this morning is cable, which of course plunged overnight on reports that UK PM Theresa May is set to push the envelope on a “hard Brexit” in a speech on Tuesday.

Markets began pricing in the “bad” news in early Asian trading and it’s been pretty much the same story since.

In the options market, DTCC reported GBP336 million in 1.19 puts expiring March 31 executed as of a few hours ago.

The risk off sentiment sparked by the pound’s struggles has given the safe haven yen a boost. “The story from the U.K. is sparking risk aversion and weighing on yen crosses,” Jun Kato, a senior fund manager in Tokyo at Shinkin Asset Management told Bloomberg, who brings us the following bullet point summary of the day’s action:

• GBP/USD whipsaws, rebounds from 1.1988 London session low to trade 1.3% lower for the day at 1.2029; early sellers faded on take-profit support, three traders in London and Europe say.
• Cable’s London open was at 1.2028; main sellers included leveraged and interbank names, some good-sized clips went through
• Offers now seen at 1.2045-50, 1.2070-80 and 1.2120-40, the traders add, with interest by fast-money names to sell on momentum lower
• No real technical support till Oct. 7 flash-crash low at 1.1841
• One-day vol surges to highest since August at 29.80%

Speaking of vol, have a look at the aforementioned surge:

(Chart: Bloomberg)

For their part, Nomura sees sterling falling to 1.18. “The market has been coming to terms with the hard Brexit stance from ministers for many weeks now and this prevented a more severe selloff,” the bank said, in an e-mail. 

Well thank God for that.

Oh well, at least Downing Street warned us ahead of time.

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For those who prefer to start their day on a positive note, here’s former FX trader and Bloomberg contributor Mark Cudmore with the bullish case:

• Sterling shorts won’t remain a sure bet
• Today’s pound slump is unlikely to sustain beyond the short-term.
• Sterling is getting hammered after the U.K.’s Sunday Times report that Theresa May will make clear her top priority is regaining control of Britain’s borders and laws, even if that means a “hard Brexit”
• I’m not quite sure this is really news, except for those in denial. For the last six months, May has regularly signaled that these were her priorities, and many have cogently argued that she’s been visibly aligned with such beliefs for significantly longer
• Also, buried amid the headlines was the nuance that May’s government is still expected to seek a transitional arrangement that safeguards important sectors -— an idea postulated in this column two months ago
• The targeted path is clear. Stop getting distracted by low- probability loopholes. The sooner the market fully registers what is happening, the better it will ultimately be for U.K. assets
• Then we can focus on the economic fundamentals that continue to outperform nearly all forecasts. A recession, seen as a near-certainty six months ago, isn’t in the cards
• To the contrary, the most recent manufacturing PMI print was at the highest level in more than two years, suggesting the economy may again outperform the euro zone
• At the moment, there’s a large uncertainty premium weighing on sterling. Even though clarity may bring a more negative picture into view, at least then traders will have some facts to position off. It’s very much a case of better the devil you know
• I’m not arguing that sterling will suddenly strengthen. The substantial negative real yield remains a valid driver of weakness. But once we have certainty on the Brexit path, monetary policy can focus on the hard data and then the negative real yield will begin to erode