Tomorrow Tuesday European Union ministers of European affairs will meet to discuss extending Brexit’s deadline beyond 29 March. Meanwhile, the UK government will for the third time try to pass its ‘deal’ through Parliament. If it passes, the government will ask for an extension to 30 June. If not, a frenzied scramble will start to find acceptable model prior to 29 March. Markets are pricing the deal to pass and the extension to be granted. One month implied volatility on GBP is subdued well off recent highs. EUR/GBP is trading just off one-year lows. Gilts continue to track lower as well.
Traders should remain vigilant in an environment politically charged and fluid. EUR/CHF might be a smarter play. EUR/CHF has been the barometer for Euro-centric risk and the pair still brings a Brexit risk premium (with a weak EU economy, Italian budget and dovish ECB risk). As probability for a UK crash-out fades, investors will reallocate from CHF back into Euro. The SNB will provide no barrier to EUR/CHF strength, giving EUR/CHF upside plenty of space.
