UK: Should I stay or should I go now? – Nomura

Analysts at Nomura explain that they know that Brexit is bad for the economy and for the pound, but what we don’t know for certain is how far that reasoning can go in determining the next three months’ trading view.

Key Quotes

“We still think the market is discounting the possibility of a more positive story in terms of higher rates and with them a higher pound. It’s this market “Brexit bias” we experienced when our earlier-than-priced BoE hiking call in the summer was deemed “crazy”, but now the consensus has seemingly caught up.  So what will be the next surprise? Given her weak performance at the Conservative Party conference, the market is focused on the possibility of Theresa May stepping down as Prime Minister. We see more reasons to stay on than to resign, but politics can often surprise. If a leadership contest gets under way, we would still expect the BoE to hike in “coming months” but the pound would still fall as the added uncertainty would be coupled with an already weak external flow picture. If we see headlines of Theresa May’s resignation, we’d expect the pound to suffer and quickly. But if Tory rebels look to the long game, we think it’s too early to push for that resignation and we’ll go back to trading the BoE and upcoming EU negotiations, both of which may contain upside surprises versus low market expectations.”

“Rates Strategy

The positioning data for MFIs from August show a long position in the 5-10yr bucket but a much shorter position in the 10-20yr bucket – this is suggestive of 5s10s steepeners having been consensus trades. This may explain why they have not worked yet, but we expect they will in due course.”