BlueBay cautious on Brexit deal compromise after UK short position pays off

The recent flashpoint over the UK’s Withdrawal Agreement with the European Union may prove to be the high point of “maximum bearishness” in the long-running Brexit process, according to BlueBay Asset Management, which has closed successful short bets on the UK and could now pivot towards a long sterling trade in the event of a compromise.

Fresh hints that the UK government may now be willing to roll back on plans to violate international law and renege on its own exit treaty with the EU will help ease fears over a no-deal outcome, BlueBay’s chief investment officer Mark Dowding said on Friday.

“Our base case is to expect a compromise between Brussels and Westminster in the course of the coming month, and for a limited trade deal to be agreed, which would come as a relief, following a period during which ‘no-deal’ risk has been rising,” Dowding observed in a market commentary on 18 September).

“Consequently, we have closed a short position in the UK during the past week, with positive contribution, and believe that the next potential trade may now be to adopt a long position in sterling, if we are able to establish conviction that a moment of compromise is upon us.”

The London-based fixed income and emerging markets specialist fund manager pointed to mid-October as a key stage in any deal agreement, and suggested that an additional ‘implementation period’ may ultimately be needed in the event of a “messy” no-deal scenario in order to prepare the necessary infrastructure at the Irish border.

“In this case, we are hoping that recent events have been shaped by Dominic Cummings’ approach to negotiation by creating a sense of crisis before pivoting at a later point,” he added.

“That said, we would still like to see more evidence that the narrative will play out in this fashion before we can ascribe greater confidence to this idea.”