60 years later, the beginning of the new EU

Trading Discussion
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That was 10 days ago, since that the UK PM has also come over to NI - this time he met with the new Irish PM - a FTA with the EU was on the agenda.

These 2 have met before when neither were leaders, they get on ok.

“The last thing we all need now is a second significant systemic shock to our systems to our economic systems and that’s what a no-deal Brexit would present on top of or alongside Covid,”

“So I did take from that a genuine view that comprehensive free trade agreement was in the best interest of all concerned, and that the British government was sincerely seeking such an outcome,”

The upbeat comments from the Irish PM, suspect some leverage being applied from him on EU in return for support from Ireland on the virus fund plan.

Bottom line - the chances of a FTA have increased.

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Some movement on GBP this week, Eur/Gbp up by 130 pips in 2 days since the release of the Financial Times news leak that UK was going to renege on the treaty signed late last year with the EU - known as the Withdrawal Agreement (WA).

Eur/Gbp can often be viewed as the Brexit cross - a rise of 130pips is large for that cross.

On sunday, before the UK leak there was news from Dublin that the UK were pressuring the Irish to in turn pressure the EU to push forward the negotiations on the FTA - in turn special arrangements for Irish truckers using GB as a landbridge to the EU (over 70% of exports to EU using GB as a bridge for which they pay a tax).

Then strangely a statement from a DUP MP also before the news release that there would have to be changes made to the Agreement - this was unusual because the DUP leader had just stated that the agreement was law and they would just have to make the best of things.

Tomorrow the UK will publish their adjustment to the treaty - the adjustment will focus on what is known as the Irish Protocol - a UK Government admitted that this was in breach of international law - but only by a little bit, he suggested…

The UK govt’s most senior lawyer has resigned in protest.

Analysis:

Likely this was thought up after last week’s informal talks between UK/EU which were unproductive - Ireland is seen as the chink in the EU’s armour - specifically the land border issue. The Irish Protocol portion of the WA is designed specifically to remove the possibility of a hard border in Ireland. The EU is very sensitive to the possibility that such a border could reignite violence at worst or undermine the Good Friday Agreement which led to peace in Northern Ireland at best.

For this reason yesterday morning the EU President tweeted:

I trust the British government to implement the Withdrawal Agreement, an obligation under international law & prerequisite for any future partnership. Protocol on Ireland/Northern Ireland is essential to protect peace and stability on the island & integrity of the single market.

Likely that the British are employing a carrot and stick policy in these final days of negotiations - will it work?

Chances are that it will focus minds to the reality a trade agreement is in everyone’s interest, not least Ireland. The risk is that reneging on an already signed deal will cause many in the EU to come to the conclusion that any deal they sign up to could suffer the same fate - therefore better off without one.

Watch tomorrow’s GBP moves.

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Oh - meant to say - the UK Govt minister when pushed by a Tory MP admitted today in the house of commons:
“Yes, this does break international law in a very specific and limited way.”

It wasn’t lost on some observers that a Reuters headline 2 months ago;
“China should adhere to international law over Hong Kong” a spokesman for UK PM said.

Anyways, this comment re international law gave a further push down on GBP

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A further 40 pips added during Asia - these 170 pips are an example of trading news without any drama. There is potential for moves either way today depending on the text released by the Govt - if they backtrack (possible but not likely, however this govt has a history of U turning) then most of the 170 pips will be gone - if the wording is as promised then some more pips to be added.

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Well the wording was as promised and another 170 pips added since publication yesterday - again a prime example of trading the news without any fuss.

I’ll give an analysis later.

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OK - quick analysis.

Post couple of days ago sums up the current state of play EU/UK - the UK move appears to have backfired insofar that the EU has now lost trust and the question suggested in my post is foremost in the minds of the 27 leaders - can we trust the UK to stick to any future agreement, and if we cannot then maybe do without agreements and just wing it.

There is a lot of politics and bias at play and successful traders ignore this - it’s the market’s opinion that matters to them. With Eur/Gbp no agreement is Gbp negative in the market’s opinion - how do I know? - price of gbp tells me - the market prices it down each time a news story suggests a no deal scenario.

What about Eur, surely no deal is equally negative?

Yes it is - it comes down to what the market perceives as strength and weakness.

Back on May 18 i was posting about the likelihood of a covid recovery plan by EU and how the market was reacting positively Eur to such a plan. There were guys on that thread who are EU negative in their bias and that bias likely reflects in their trading - they were suggesting a drop in EUR - it didn’t happen - Eur/Usd rose over 1100 pips from May 18 - the low being that same date.

My point then and is now - don’t listen to propaganda (bias) - it can be correct only 50% of the time - instead listen to what the market is doing - and it will tell you by marking price either up or down.

Post on May 18th - is the market predictable?.

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Daily chart of Eur/Usd since May 18th

Eur-Usd-Daily
Eur-Usd-Daily774×500 27.6 KB

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Looks like winging it is to be the way forward for UK/EU trade.

EU Parliament likely to issue a statement to the effect that it will not approve any deal reached unless UK implements the already agreed WA.

Basically saying doesn’t matter what Barnier and Frost agree - it will not get the required approval.

UK are building large truck parks in South of England - had to enact laws to bypass local planning - stage is set - bit like a Mexican stand off.

Statement likely to be issued soon - not likely to affect price either way this late.

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Just a comment on the chart up above - maybe it’s noticeable how price has flattened in the last qtr of the daily chart - that period is August.

That same period represents a high in OI (cot) going back - well many, many years.

Likewise Commercials are way out on a limb selling Eur like no tomorrow.

The ‘crossover’ from long to short was start of March - and very determined.

So maybe we can learn up ahead - how come comms are selling Eur when it’s on the rise - are they kinda stupid and thus sell a product while it’s value is on the rise?

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Nah, they’re not stupid - they are just in the money business and currency is what the accountants call ‘stock’.

I buy stock as it gets cheaper - the more value it gets the more I’ll buy. Then conversely having stock and i see it’s value increase there is only one thing to do… make some profit by selling some stock :slight_smile:

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There are some hints that fisheries may be closer to agreement - this is always the easiest nut to crack - high political impact but very low economic impact - the UK govt is quite good at explaining a change in political thinking so would have no problem in selling this part.

Two larger problems - one is an older one, what is known as a ‘level playing field’ similar to wto rules on state aid.

The second problem is perhaps the most difficult - a robust dispute resolution system - this is a new difficulty, based around trust - that commodity is very scarce atm

Next few days are crucial - possible large moves on GBP in near future - if the rumours prove true.

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Update - the Parliament duly issued their statement. Likewise pressure from the US has been applied - Dominic Raab (UK Foreign Min) was dispatched to US by No.10 to calm ruffled feathers re the Good Friday Agreement following various statements from the Senate.

Not sure what he hoped to achieve but bottom line from Dems and Republicans was echoed in Sec Pompeo’s comment that he trusted the UK would do the right thing in relation to Ireland.

Soon after Mr Raab returned to the UK Pres Trump’s Special Envoy to N. Ireland Mick Mulvaney likewise issued a warning against “creating a hard border by accident”.

The message from the US was clear - the Good Friday Agreement was hard won.

So the question is will No.10 think again on the notion that it will break it’s promises with regard to Ireland in the Withdrawal Agreement.

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That’s what the rumours were about - No.10 (likely one ‘special advisor’ had come up with the plan to pressure the EU via the Irish Border question) - the plan hinged on support from the US and possible partisan division in the States - probably a failure to understand the relationship between the Irish people and America.

Anyways - bottom line, today I read a headline in a Northern Irish paper
"No10 drops food blockade fears amid Brexit deal optimism"

(the notion that the EU intended to food blockade NI was the basis that the UK proposed to break the Withdrawal Agreement)

Thus the latest from UK:

We have had useful exchanges with the EU over the past couple of weeks and progress had been made in certain areas".

So if I were a betting man I would bet on …

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This morning the UK Times reporting " Hopes of deal rise as EU says it is ready to work on legal agreement"

Long story short seems the talks will include text on any final agreement.

Talks have been extended for this week - at least there is now engagement.

There has also been some limited movement or other aspects - will report at weekend - cable has risen over 100 pips since the weekend.

Likely to be some hiccups and negative comments - will be looking to see if they go into the ‘tunnel’ which would be a positive sign.

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First one this morning with the announcement that EU has begun legal proceedings - they did say back a couple of weeks that today was their intended start date for same, re-iterated that again on Mon past so no big shock.

Gbp has nonetheless fallen on the news - cable dropped over 100 pips (so much for the theory of news already priced in I suppose - confirms my oft posted assertion that they bring it up to take it down, i.e. yesterday’s rise)

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The hiccup is over and the positivism has returned - the talk has now moved to the tunnel - well actually President von der Leyen said today that she doesn’t like that word so the new word on the block is “intensify”.

Fisheries seemingly sorted - remember back many months I said that this one is actually the easiest to resolve since from an economic perspective it’s small.

The level playing field is well on it’s way to being sorted, although some hurdles remain, I would be surprised if the ‘intensified’ talks cannot sort that.

Security is pretty much in the bag - this was one of the easier topics.

There’s an elephant in the room - seems they are leaving it to last, almost like the UK won’t raise it and the EU, like a poker player, are hiding it.

As for price - both Eur/Gbp and cable are back to their respective high and low of Monday past - so it’s a case of carry on where you left off - hiccups now cured :slight_smile:

(thing about hiccups - they can be traded and/or can shake out the unwary.)

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Latest update - joint statement from UK PM and EU President today to the effect that gaps remain on fisheries, level play field and governance - they instructed their respective negotiators to “to work intensively in order to try to bridge those gaps”.

See the new word on the block now being used - positive signs.

There is a new ‘gap’ - governance. The dispute resolution system envisaged by UK was similar to WTO dispute resolution but the shenanigans with the ‘internal market bill’ whereby the UK intends to set aside portions of the previous agreement has caused a serious lack of trust in the EU capitals.

The EU are now insisting that there must be a speedy and effective mechanism of dispute resolution in any further agreement with the UK.

The one strange thing not raised yet by the UK is finance - cannot figure why - I see JP Morgan are in the process of moving substantial capital from London to Frankfurt to be completed before the expiry of the Transitional Period Dec 31st 2020.

The sum is reported to be around $230 billion

Anyways, hopefully finance will be included in the final chapters.

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got the date wrong

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I am a firm believer of history repeating itself.

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UK PM, Boris Johnson called France President Macron today - the PM spoke of the need for “intensive” talks.

This call has made UK news because it was released through No.10 press office.

The release went on to state the common ‘threat’ that the UK is happy to trade in ‘Australian terms’ with the EU in the absence of agreement.

This ‘Australian’ trade model has been mentioned many times by no.10 - problem is that the EU take little notice because EU/Aus trade, due to geography, has no cognizance of JIT (just in time for major manufacturers, food industry and pharma).

Anyways, the significance of the press release is more for UK consumption - didn’t get a mention in EU press - it highlights the UK PM taking a hard line.

Reality is that behind the scenes there is progress - state aid has seen some compromise,

On fishing Barnier has been seeking some movement from EU states arguing that for coastal states a no deal will be worse off for them

On the Ireland question there have been in depth discussions - although the legal action by the EU on proposed breach by UK on that point continues.

Overall I remain optimistic that there will be a deal agreed, likely few leaks in the week ahead but we’ll see.

GBP will react positively on positive news of a free trade deal (FTA) and negatively on negative news. Whether that market judgement proves to be correct or not is irrelevant for traders because - the market is always right :slight_smile: