UK: What do ‘Hard’ and ‘Soft’ Brexit actually mean? - Nomura

Analysts at Nomura point out that hard, soft, “cliff edge” and smooth Brexit, the list is growing tiresome for the United Kingdom.

Key Quotes

“There are so many versions of Brexit, where explaining just what “hard” Brexit you are referring is a conversation in itself. While “Hard vs Soft” has become the standard classification of Brexit, it lacks nuance as there are key differences for the UK and asset prices. Instead, we prefer to use a five-level system with clear definitions of Soft (Level 1, EEA membership) to Hard (Level 5, No deal WTO cliff edge).”

“Currently, we would say that the market is somewhere between levels three (concessional deal with limited single market access) and four (Bare bones FTA) and is likely to continue to hover between the two for the time being. Once the actual negotiations get underway, there may be certain “flashpoints” that catch the markets’ attention, be it a “walkout” from either side during dinner talks or strongly worded political speeches. These will likely prove to be shortterm negotiation tactics rather than a sign of the final outcome, albeit the market will price along the Brexit spectrum as appropriate, allowing for tactical trading along the way.”

“Some interpret the election as a way for Ms May to strengthen her ability to negotiate with the EU-27. We do not agree with this. Our base case is for the Tories to get more support, which would strengthen Ms May’s position within the party, thereby making the extreme ends both sides of the Brexit spectrum (levels 1 + 5) less likely in our view. While Brexit will continue to dominate the headlines, we are long GBP here from a fundamental standpoint and tactically short Gilts.”