The big forces behind Brexit are playing their hands
Nothing is easy in life and trading is certainly one thing that's not. Brexit isn't either and that makes trading it even harder. There are so many moving parts to Brexit that it's sometimes hard to grasp.
For me, I have to wear two hats, one as an Englishman in the midst of Brexit, the other as a trader who has to take an objective view. The moment you let your heart rule your head while in front of a trading screen is the moment you can blow up your account.
Here's my view of Brexit trading right now;
The gloves are off
Theresa May has set her stall out over sending the article 50 letter to Europe and now we're even more into the threat and counter threat phase between the UK and Europe. If there's one thing a market doesn't like it's that kind of crap flying around because it's not tangible or credible news, it's high end mud slinging and one-upmanship. That does not give the market a plan or something it can grasp for good or bad. In that situation, the market will think of the negatives and none of the positives and that's what we're seeing with the pound right now. The fact is that nothing has really changed between Friday, and May's comments over the weekend. All we know is that a letter will be sent in March 2017, and the process will begin. We're still no further to hearing what negotiations might be like.
The UK economy
A point I make time and time again. There is two sides to Brexit for the UK economy, what happens domestically in everyday life, and what the world thinks of the UK and how it acts on that.
UK citizens are still shopping, they're still buying houses, cars, holidays, clothes, food, petrol, fags, booze, going out and everything that people do everyday. That side will continue whether we're in Europe or not.
Investors, both in the UK and abroad are the other side. We are a hot spot for a lot of foreign money in property, financials and businesses. That's where most of the risk lies in the short and long-term. That also has a knock on effect because of jobs, which will effect a lot of what I've listed under the domestic factors if money starts leaving and businesses start moving. The cost to the UK will be huge if we lose our financial hub status. But for all the grandstanding the banks and countries like France make, cold hard cash will always win. A UK corporate tax rate of 20% (going to 17%) is nearly half of the rate in France and Germany. That's a big number for firms and banks to apply to their books. The banks are moaning about their profits being squeezed so they wont want to lose even more of what they make to tax. The reasons why the UK is the financial power it is goes much much further than passport access. The UK has been a financial centre for centuries so the question should be not what the UK may lose but what can any other European country can offer to replace it? So far they've all come up short.
But even so, and aside from all that, the uncertainty is still huge and adds to the pressure on the UK and pound.
The Bank of England
Another with their stall set out. They will cut again if their August projections become reality. The data has been better, if only to undo the Brexit shock and put us back where we were before then. Even just looking at the survey data we can see how things have improved.
UK data
All the contractions from July have turned back to expansion. In the case of manufacturing, it's at the highest for over a year. It's not just the main data we see that the BOE will act on. They're all about business investment, slack, productivity, prices, household savings, consumption, financial conditions. Here's their conditioning assumptions from the inflation report. This is what will decide another rate cut. A lot of this data is derived from bits and pieces from the main data we see day to day. We don't really get a handle on those details so we can only look at what's put in front of us. And what's being put in front of us is better than it was since July, and if it continues, we and the market can start to assume that the BOE may not cut in Nov. That's a positive for the pound but can we even think about trading the BOE in this current storm?
Trading
I've long said that Brexit trading would be more than the vote day and initial aftermath itself. The hard part is what we're in now, the long drawn out uncertainties. No one knows what deal will be done. We've all got an opinion on what may happen but that's all it is, an opinion, not fact, mine, yours, the bloke down the road. Not one of us knows the outcome. Not one of us knows the consequences. What history in trading has taught us time and time again is that it's never as bad as the extreme predictions say, and neither is it as good as the most positive predictions say, and that's what we should be using to trade. If you want to sell the pound because you think the UK will disappear up its own behind, go for it, it's your money. If you want to do the complete opposite then the same applies. What I'll be doing is looking for the middle ground between those two extremes because I've been shown again and again that that is where things usually fall.
So my opinion is still the same as it was before and immediately after the vote, that things won't be as bad as made out. So far I've been proved right by the numbers. However, I haven't been stupid enough to bet my house on it because I know that there's far more to come, not just from Brexit but from the US. I would love to buy the pound because I now think that the BOE won't cut in Nov but I won't because there's far bigger bearish factors at play right now.
I'd love to start buying the pound because I don't believe we will be seeing the worst case scenario that many paint, but I still face the same predicament with the current price action.
I also don't want to start buying the pound because I've got very little in the way of technical levels to lean against. On the long-term charts 1.1580 is the only level that sticks out.
GBPUSD yearly
Whenever I trade I like to use levels to scale in against, places where I can question my risk and my strategy, because for all my opinions and views, I still like to see something tangible to try and use in my trading.
Short-term I'm inclined to sell the pound but I'm not a chaser so I'd want to see the levels develop, like the old range that's just broken. We may never get a look at those levels again so that leaves me high and dry for a trade there too.
For me and my trading, Brexit is turning into the mess I knew it would. It's easy to jump into a hope short or try and pick that bottom but I've never been one for those kinds of trades and I'm not about to start now, just because I think I'm missing out. The opportunities will come with patience, as they always do. All we can do is pick our points where the risk is as low as possible and the rewards as high as possible.
Until then, leave the sensationalism out of your trading thought process and look at what actually happens in these kinds of events compared to what people usually guess will happen, and let that be your trading guide.
