Trading sterling is a Brexit-headline minefield at the moment but the moves on Wednesday helped to underscore the mood of the market. Choppy trading ahead of the US ADP report and services ISM. Thursday is a key deadline in the China-US trade saga. A new index trade has been issued..
There are two ways to evaluate Brexit negotiations. The first is the economic lens; namely, what's good for the economy going forward. This means pricing in the chance of a no-deal Brexit that immediately leads to a reversion to WTO rules. Goldman Sachs puts this at an uncomfortably high 30%, while Carney this week said it was 20%. The positive baseline would be a transition period that meets the status quo and a high likelihood of a future trade deal that maintains a strong UK financial services sector. The ebb and flow is a complicated balancing act that also includes the odd talk of another referendum and endless political backstabbing.
The good news on Wednesday was a report saying the UK and Germany were prepared to refocus negotiations on a transition period that largely maintains the status quo while leaving discussion about the future relationships until after the March 29 deadline. The bad news was a denial that anything had changed from a German government spokesman a few hours later.
The other lens to evaluate Brexit negotiations is price action. The market's reaction to the news often tells you more than the news. On Wednesday, cable jumped 150 pips on the initial story and then gave up half on the denial.
Last week, a similarly vague, anonymously sourced story sent cable 150 pips higher and that was followed by a dismissal of the Chequers proposal that sent it 90 pips lower on Monday.
This examples are oversimplified but they're a glimmer of hope for the pound, which has undoubtedly been beaten down by many months of negative Brexit headlines and fear. At some point there will be clarity and it's in everyone's best interest to strike a trade deal. That doesn't mean it's time to buy the pound just yet.
Surely over the next few months there will be intermittent negative headlines, even if/when a deal is nearing. Negotiations are always toughest at the end. The event to watch for will be when sterling no longer falls on the 'bad news' headlines. When the denials are brushed aside. We may be nearing that point but we're not quite there yet.
On other trade deals, a similar uncertainty remains. Late on Wednesday there were faint signs of a NAFTA breakthough as Trump softened his tone and Canada and the US put together an unexpected meeting. A CAD-boosting deal could come before the end of the week.
Today is also the end of the comments period for the tariffs of 25% on $200 billion on Chinese imports. A recent report said Trump is considering announcing that the US will be going forward with the tariffs with implementation to follow in three weeks or less. This would be a major escalation from the current tariffs on $60B of goods.