A tactical short in GBPCHF has been initiated in response to the volatility shock as the UK has the heaviest reliance on short-term funding flows of any major economy (the UK's current account deficit was largely funded by equity & FDI prior to the Brexit vote but these have collapsed to pretty much zero since pushing the UK’s basic balance deficit to around 4.5% of GDP).
But things are never straightforward with GBP and the currency has remained pretty resilient as:
1) The BoE continues to talk up the prospects of earlier and faster rate hikes despite an economy that appears to be stumbling again after a brief upswing; and
2) The sentiment towards Brexit has improved. The cabinet held a meeting on Brexit Thursday and the PM is due to set out her government’s vision for Brexit next Thursday or Friday.
Meanwhile, opposition leader Corbyn is due to give his own speech on Monday which is widely expected to signal a change in Labour’s position to favor remaining in the customs union.
We hold the short cash position for now, albeit recognize that GBP has the potential to rally further should the Brexit news flow continue to shift in a more constructive direction.
Trades:
Sold GBPCHF at 1.2971 Feb. 9th. Marked at 0.96%.
Long a 1Y vol swap in EURGBP. Opened at 8.85% November 21. Marked at -1.3%. Courtesy: JPM
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