A No-Deal Brexit on December 31 Could Put Pound Bears in the Driver’s Seat

[Money Trends with Andy Krieger]( Welcome to Money Trends! If this is your first time reading one of our issues, learn more about us [here](. And if you have any questions or comments, shoot us a note anytime [here]( or at feedback@andykriegertrading.com. A No-Deal Brexit on December 31 Could Put Pound Bears in the Driver’s Seat By Andy Krieger, Editor, Money Trends Brexit might go down in history as one of the most amusing and twisted economic events of all time. And it could all come to an end on December 31… The EU and the UK have until then to implement a free trade deal that covers about $900 billion worth of annual trade. When the UK voted to leave the EU four years ago, the people in Brussels were shocked that the UK would dare abandon their beloved project. They also worried that more countries might follow the UK and leave the union, thereby damaging the efforts of the power-loving bureaucrats to back into a de-facto nation status. Accordingly, the leaders in Europe decided to make an example of the UK by making their exit as difficult and painful as possible. They didn’t want to see a mass exodus of other nations, so the UK has received particularly rough treatment during trade negotiations over the past several years. Now, in about two weeks, the long, torturous road may finally be coming to an end. The UK and the EU will either reach a free trade deal this month or not. But the question remains: Will we get a deal done before the December 31 drop-dead date? The original deadline of October 15 set by UK Prime Minister Boris Johnson has long passed. Today, I’ll show you why the charade is far from over – and what it means for currency traders. Messy Divorce Essentially, the EU and the UK are working out a comprehensive divorce settlement that covers the “rules for how to live, work and trade together,” as BBC News puts it. But like all messy divorces, people can behave highly irrationally. And, considering the makeup of the EU, it’s no surprise there have been so many obstacles on the road to Brexit. The EU is a funny mix of countries, with powerful economic juggernauts like Germany and the Netherlands, as well as economic basket cases like Italy, Portugal, Greece, and Spain. For many decades, the economically inefficient nations simply resorted to currency devaluations whenever their external imbalances started blowing out to dangerously high deficit levels. But with the launch of the euro, this strategy was no longer possible. Their inefficiency led to huge economic problems domestically. Everybody had their currency level locked in, and they were forced to compete with the far more efficient and harder working Northern Europeans. The Germans, in particular, really couldn’t understand why the Southern European nations didn’t work as hard or as efficiently as they did, but they were happy to grab market share and flood these countries with their products. Since the Great Recession, the inherent weakness of the EU bloc became progressively more apparent as massive quantitative easing never really triggered much of a recovery. Debt-to-GDP ratios worsened, and interest rates tumbled into negative territory. The European Central Bank’s (ECB’s) balance sheet exploded during the Great Recession, and it has never normalized. In fact, the balance sheet has expanded to levels during the pandemic that were once unimaginable. You can see this in the chart below. [image] Still, the ECB’s desperate efforts have been in vain. Even though their balance sheet has exploded, the economy is imploding. The ECB’s President, Christine Lagarde, announced this month that the EU zone will have growth of roughly negative 7.3% in 2020. For 2021, she now projects growth of 3.9%. The 3.9% forecast is a downgrade from an earlier forecast of 5%. Moreover, she is expecting inflation of less than 2% through 2023. Negative interest rates, seemingly unending monetary stimulus, and fiscal support are doing little to help the economy pick up. With the European economy so weak, one would expect the European authorities to be reasonable and flexible with the UK, a major trading partner. But despite the EU’s dismal outlook, it’s playing tough with Britain. Likewise, Britain’s economy is struggling. In fact, the UK economy is doing even worse. The GDP will plunge over 11% in 2020, before rebounding by 6% next year. Unemployment, however, will worsen dramatically once the government’s furlough scheme ends. Given that the EU is such a critical trading partner for the UK, it is quite remarkable that the UK’s prime minister is playing such an aggressive game of chicken. Recommended Link [Billionaire-Insider’s No. 1 Tech Stock Recommendation EXPOSED?]( [image]( Behind closed doors in Vancouver, Canada, [this billionaire-insider]( pulled back the curtain on a unique type of stock that has exploded an extraordinary… 15,057%, 46,589%, 86,729%, 298,200%, and 10,000,000%. Even better, he revealed the full details of one stock that’s trading for 81¢… But 99.9% of regular investors have no way of properly identifying it. So while this uncensored footage is still online… [Click here to get the full details on this 81¢ stock]( -- Nefarious Motivations Until now, the market has largely priced in a positive resolution to the dispute. The alternative would be so painful, that rational people thought a hard Brexit alternative would be unimaginable. As it turns out, however, the UK now appears to be hurtling towards a possible no-deal Brexit. This would result in a minimum 2% hit to the UK economy and cost at least 300,000 jobs. Why no-deal? One of the key reasons is quite perplexing. The EU economy is over $15.5 trillion, and the UK economy makes up about $2.8 trillion of that. Yet the main stumbling block is whether French fishermen can continue to have unencumbered access to fish the UK waters. It is estimated that France catches about 30% of its total fish in UK waters. Belgium, the Netherlands, Ireland, Spain, Sweden, and Germany also fish in British waters. Altogether, a bit more than 60% of all the fish caught in UK waters go to EU destinations. The market value of these fish is about $780 million. As a percentage of the EU’s total GDP, this comes out to roughly 0.005%, not even a rounding number. Even if the UK banned all EU fishing in its waters, the total economic impact on the EU would be miniscule. So miniscule, that it is almost impossible to believe that this topic is the main issue preventing a deal. In fact, it is so ludicrous, that there must be a far more nefarious motivation blocking the negotiations. Remember, there is over $900 billion of annual bilateral trade at stake here. The EU could easily find some way to subsidize the noisy French fisherman who are putting up the most fuss rather than impose heavy tariffs on the massive trade with the UK. Therefore, one must conclude that the EU simply isn’t dealing in good faith, as it doesn’t want to accommodate the UK. So now, it’s “teaching the UK a lesson” and setting a nasty warning for any other nations who might consider leaving the trading bloc. Sure, France’s president, Emmanuel Macron, wants the political support of the French fishing villages, but not at any cost. Clearly, the high tariffs will have a negative impact on the sale of German cars and French luxury goods in the UK market. So the political need to punish the UK must be very high. In fact, this is a perfect example of how the political machinations of people in power often have very little to do with the needs of the people they are supposed to be serving. But, politics aside, what does this all mean for currency traders? A Compelling Bet When the pound was trading at 1.27 against the U.S. dollar, the consensus view was that a successful free trade agreement might see the pound rally up to 1.35, while a hard Brexit would lead to a pound dropping rapidly to 1.15. To the market, a hard Brexit made no sense, so it preemptively priced in a free trade agreement. Today, with the pound trading around 1.36 against the dollar, traders and investors still refuse to accept the idea that the UK and the EU won’t reach an accommodation before the end of 2020. Therefore, we have a situation with an exceptional risk-reward priced into the market. Short pounds can easily lose several percent, but a hard Brexit could quickly generate a seven or eight percent profit, or more. Do I think that one or both sides will blink, salvaging at least a Brexit-lite deal that avoids a total catastrophe? The chances of this are reasonable. But the skewed risk-reward is so compelling that it is still worth taking a bet on these negotiations. In short, the probabilities of a successful Brexit deal diminish every day. We believe this will help put pound bears in the driver’s seat. Regards, Andy Krieger Editor, Money Trends --------------------------------------------------------------- Like what you’re reading? Send your thoughts to feedback@andykriegertrading.com. [Money Trends with Andy Krieger]( Andy Krieger Trading 55 NE 5th Avenue, Delray Beach, FL 33483 [www.andykriegertrading.com]( To ensure our emails continue reaching your inbox, please [add our email address]( to your address book. This email was sent to {EMAIL} because you subscribed to this service. If you no longer wish to receive emails from Money Trends with Andy Krieger, [click here](. Andy Krieger Trading welcomes your feedback and questions. But please note: The law prohibits us from giving personalized advice. 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