Happy Brexit Day! Prepare For “Perilous Journey Ahead”

Well, today’s the day. Brexit day that is.

Which means Prime Minister Theresa May will make things official at 1:30-ish p.m. Brussels time when she’ll send a hand-signed letter to EU President Donald Tusk. As Bloomberg notes, “so secret is the letter that not even some of May’s senior ministers had seen its contents before she signed it in the Cabinet room on Tuesday afternoon.”

That kind of reminds me of the Brexit referendum itself. Most voters didn’t understand the EU’s contents before voting to leave it.

Anyway, sterling weakened against all except one of its 16 major peers, falling after Scottish lawmakers voted Tuesday to back plans to pursue a second referendum on splitting from the U.K.

Below find some thoughts on this rather historic event from former FX trader Mark Cudmore who last week was really confused as to why anyone would still be short sterling at this point.

Via Bloomberg

The day has finally arrived. Severe risks to the U.K. economy litter the path ahead, but this isn’t the time to trade on them.

• It’s always important to differentiate between asset pricing and the economic outlook. They are clearly connected but, importantly, any correlation is discrete in nature rather than continuous, and the lag is jumbled and inconsistent
• The U.K. economy keeps confounding the doom-mongers. It may continue to do so but, once Article 50 is triggered, it becomes very vulnerable to any hints of an acrimonious hard Brexit from the EU
• That must worry everyone who trades U.K.-related assets. However, it doesn’t mean they should sell upon the official trigger — it means they probably did already as they’ve had months of warning
• This will be like knowing you’re going to be pushed off a cliff edge, preparing for the worst, and then landing on a ledge just below. It doesn’t mean you won’t ultimately plummet to your death, but there’s the relief of an unexpected opportunity to save yourself. You’d already fully prepared for the drop so this is a moment to instead consider if there’s any way back up rather than repeat your preparation for the fall
• The data shows that speculative sterling shorts are at a record.

• At some point, those positions have to be unwound. After Brexit is officially triggered, there are no other concrete dates on the horizon for bad news, so many shorts will be closed
• As a result, from Thursday, it’s logical to assume that the dominant flow in the coming weeks will be pound purchases. That could lead to quite a hefty rally
• This won’t be a sign from markets that Brexit will be wonderful. And, in fact, sterling appreciation would make the economic future even tougher
• There’s a perilous journey ahead but, at least for now, the potential path upwards deserves more consideration and focus than the downside option