by Tom Luongo
Deal or No-Deal, when it comes to
BREXIT, the euro is toast.
Markets, however, believe
the fantasy of its survival. And as we approach the end of July the
euro clings to support at $1.11, mere pips away from a technical
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
The only negotiation that
went on during (Theresa) 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
But here's the thing.
The eurozone is
facing a recession.
I've talked about
Germany's freefalling economy
It's not getting any
better. And it won't if a no-deal BREXIT occurs.
Forex markets are offside today.
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.
The wine tariff is
Trump is attacking
the French side of the brewing war for control of the EU.
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
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.
As Martin Armstrong
points out today:
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
Jay Powell and
the FED won't disappoint on
Europe can't and won't respond to Johnson until the last possible
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
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
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.
Those in favor of the UK remaining in the EU are sometimes referred
to as "Remainers". The derogatory term "Remoaner" (a blend of "remainer"
and "moan") is sometimes used by Brexiters to describe adherents of
the Remain campaign.
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...