The EU doesn’t have a strong hand in Brexit negotiations. From Tom Luongo at tomluongo.me:
Deal or No-Deal, when it comes to Brexit, the euro is toast. Markets, however, believe the fantasy of its survival. As we approach the end of July the euro clings to support at $1.11, mere pips away from a technical breakdown.
That breakdown will trigger a wave of asset liquidation and another round of negative headlines emanating from troubled German banks.
With 10 Downing St. now saying No-Deal is acceptable, the hard line negotiating tactics of the European Union have hit a rocky shore.
Because it looks like Boris Johnson is ready to give as good as he gets.
I’ve been saying this for a long time. The EU is not a tough nut to crack. They have no leverage in these Brexit negotiations.
What they had was a stacked deck of British officials negotiating with Brussels on Brussels’ terms.
It’s not a negotiation if both sides agree on terms. It’s a surrender.
The only negotiation that went on during May’s administration was with the British people on accepting the horrific treaty written by German Chancellor Angela Merkel’s staff and rubber-stamped by May.
Today Britain looks different, at least on the surface. The market is punishing them for entertaining No-Deal.
The pound is falling out of bed today below $1.24 because Johnson looks serious about re-opening negotiations or opting for No-Deal.
But here’s the thing. The eurozone is facing a recession. I‘ve talked about Germany’s freefalling economy before. It’s not getting any better. And it won’t if a no-deal Brexit occurs.
So the forex markets are offside today. Way offside.
Johnson came out and bypassed the Withdrawal Treaty completely saying let’s just move to Stage 2 of Brexit, the free-trade agreement.
You never would have heard that under Theresa May.
That’s why the pound is getting crushed today. At some point, however, that move will get overdone. The EUR/GBP pair is way overbought and was looking toppy before Monday’s massacre in the pound.
What’s clear, however, is that in the short term, the pound will be allowed to collapse to assist the ‘Remain’ case. As the media focuses on the pound falling it neglects the pound is now more attractive to U.S. investors.
It’s making Trump’s offer of a free-trade deal more attractive to wobbly Tory MP’s.
The pound has been over-valued for years thanks to being slaved to the euro-zone. President Trump knows this and this is why he backs Brexit as well as both Johnson and Nigel Farage.
It’s also why Trump is going after France for its new taxes on U.S. tech firms. The wine tariff is political cover.
Trump is attacking the French side of the brewing war for control of the EU. France’s President Emmanuel Macron, while ignoring the rising potential for domestic revolution via the Gilet Jaunes, has positioned himself as the de facto leader of the EU as Angela Merkel’s political power wanes.
And Brexit is the key to this. Macron wants to punish Britain for Brexit. He’d rather a no-deal than any concessions. Merkel will countenance a deal rather than lose the U.K. completely. Mike Shedlock is right, the EU is complacent now about a No-Deal but panic will soon set in.
No-Deal Brexit is very much on the table.
Would Macron allow a no-deal to hurt rival Germany since Germany’s trade deficit with the U.K. is more important to them than France?
I think so.
Johnson would be happy to sit down with Trump and cut a free-trade deal yesterday. But being in the EU forbids this. And it’s France that is the biggest obstacle, regardless, just as it was for any EU/US trade deal.
The restrictions on trade imposed by Brussels are impossible to manage because all 28 members have a say in any trade deal. This is why the deal with the USA took so long to start with and it became unworkable. Trump offered a free trade deal and France was the one screaming the loudest. Germany cannot cut a deal with the USA because of France and neither could Britain.
A breakdown in the Euro below $1.11 puts it on the path to its low at $1.034. Markets are screaming for the Bank of England to cut rates alongside the Fed on Thursday.
Why? The markets are against Brexit.
In essence the market is front-running a rate cut and it means we could see the pound at $1.20. But euro-traders are still clinging to hope that Jay Powell and the Fed won’t disappoint on Thursday.
Europe can’t and won’t respond to Johnson until the last possible minute. Its hardball tactics on Brexit are all it has.
Johnson’s initial calls with EU leadership left things exactly as they are. It’s clear they hate him. It’s also clear the EU still thinks its agents in British parliament can block Johnson’s plans to exit without a deal on October 31st.
Those people are now the EU’s best hope, but they don’t have many if any tools left if Johnson is serious about October 31st.
A pending election won’t stop Brexit. The government won’t allow a revocation of Article 50. If it were possible Theresa May would have done it.
All they have is delay and attrition. The road, however, looks like a dead end.
Johnson, for his part, is smart in using the Irish backstop as his wedge issue. He’s turning it around on the EU who used it as a cudgel wielded by Theresa May earlier this year to bludgeon Tories, including both Johnson and prominent Brexiteer Jacob Rees-Mogg, into voting for the deal as the threat to Brexit looked existential.
Johnson and Rees-Mogg both paid politically for this vote and will continue to do so. While the opinion polls have moved their way in this past week, the situation between the Tories and the Brexit Party is still very fluid.
Johnson knows this. Brussels knows this. And if their planned sabotage of Brexit fails over the next ninety-plus days, the markets will finally come to terms with it.
Farage has played this smartly, as I pointed out last week, handing Johnson the talking points he needs to consolidate power after he delivers Brexit. If Johnson is serious about bringing about a post-EU golden age for the U.K. then he would be taking Farage up on his offer of help to deliver wins in the Labour-heavy Midlands where Brexit did so well in the EU elections in May.
That’s the way things look like right now. Johnson is creating an environment for a post-Brexit general election to consolidate power, destroy the Tory Remainers and crush the resurgent Liberal Democrats who have become the single-issue Remain party.
But he can, only with Farage’s help, take control of the Midlands, England’s version of “Les Deplorables” for a generation. That’s the thing markets will have to come to terms with.
The EU will then have to stop distracting itself with trifles and turn back to the reality that it is a club that fewer and fewer want to be a part of. Just wait until the markets figure that out.