Page 6 - PowerPoint Presentation

> Brexit – Is The Mist Clearing?

Under the theory, the actors, that is the negotiators, will go for the option which has least
risk in it for themselves.

The Bank of America strategists see it as rational for both the ‘actors’ in that ‘game’ (i.e. the

EU and the UK negotiators) to avoid the risk of a WTO cliff-edge by opting for a sensible
transitional trade agreement.

That it is in the best interests of the UK and the EU to make rational decisions is no surprise
to the UK’s Brexiteers.

All possible outcomes, other than a rational agreement or interim agreement, have the

excessive risk of a detrimental WTO cliff-edge hanging over them.

What does this mean for GBP/USD?

The expected effect on the exchange rate of the brokering of a transitional trade deal would
be for it to rise to above 1.30.

The expected penalty for not brokering such a deal would be a move lower to 1.10.

There are already murmurings, on both sides of the negotiation, to consider the possibility
of a transitional agreement for the UK.

The longer-term view is that GBP is seen as undervalued and is expected to rise once the
uncertainty of the negotiations are put to bed. Factors such as the property market and

global growth tend to reinforce this view.

We are depending on the rationality of the negotiators!
One big problem with the game theory approach, however, is its assumption that actors will

act rationally.

Call it ideology, politics, popularism or whatever you wish. There are many commentators

who would argue that neither the public nor the politicians of the EU and the UK have

shown much regard for logic or for being rational so far, so watch this space!

Conclusion

We believe that there are early signs that the mist is clearing around the Brexit issue. Time,

UK economic strength and world events are combining to allow greater confidence of a
sensible outcome to Brexit. However, it is by no means assured.