Publications
Partners
A “Brexit” refers to the possible British exit from its membership in the European Union (EU). The U.K. public is set to hold a referendum on whether continue or end its 43 yearlong membership with the EU.
When is the referendum?
The vote takes place on the 23rd of June 2016 and much like with presidential elections, votes will be tallied and should be available to the general public the following day (24th of June 2016).
The looming referendum on whether the U.K. will remain part of the European Union (EU) has asserted itself as the prevalent market theme at present.
A decision to leave the EU would in essence create more sovereignty for the U.K. with arguably “less” bureaucracy, however, not staying part of the broader union would certainly see the benefits thereof diminished, in the uncertainty of renegotiation. The list of matters relating would include investment & trade, employment, foreign affairs and security to name but a few.
Should the referendum result in an exit from the EU being favoured, the U.K. government will need to inform the European council of its intention. A withdrawal agreement would them be negotiated and while the negotiations are underway the U.K. would remain a member of the EU.
These negotiations if not completed within two years will see the withdrawal forced into place (failing a vote to extend negotiation timeline).
The Financial Times poll of polls as of the 21 June 2016 suggests that 44% of votes are in favour of the U.K. remaining a part of the EU and 44% of votes are in favour of leaving the EU, while 12% are undecided.
It should be noted that as the referendum vote nears, polls have moved from broadly favouring the “remain” vote towards neutrality and in turn uncertainty. Uncertainty will always breed increased market volatility pre and post the scheduled event.
If we trust the polls then it would appear that the swing vote lays within the hands of the undecided at present.
The global IG analyst team consensus in majority is of a vote to remain.
The IG EU referendum binary (as of 21 June 2016), which balances market polls, sentiment and client positioning, places a higher degree of certainty with the “remain” camp at 73%, with the leave camp currently at a 27% probability.
The currency view
It appears that the base case scenario among economists, analysts and big business alike is that the “Brexit” will be averted (although conviction thereof is waning as we draw closer to the event).
This would therefore assume that the greater shock to markets would be the actual realisation of a U.K. exit vote materialising.
In this scenario, selling the GBP or EUR to buy safe haven currencies such as the USD or JPY might be expected to yield favourable short term results (also referred to as “shorting” GBP/USD, GBP/JPY, EUR/JPY or EUR/USD). This implies an expected weakening of the GBP and/or EUR in its uncertain environment as the USD or JPY attract funds through their relative safety appeal.
Inversely, should a “remain” vote be secured in the referendum, buying the GBP or EUR and against the USD or JPY might be the favourable play as the EUR and GBP shrug off pre referendum jitters to find renewed short term appeal through the safety of continuity.
The upside (should it occur) however is expected to be limited as it is perceived as the probable base case scenario mentioned above.
Options are volatility products and at current levels most appear to be elevated in terms of pricing, so this might be a period where traders consider starting to sell options as opposed to buying them.
FX options with exposure to the GBP or Euro related index options might be a favoured consideration in this regard. Selling volatility (options) does however come with risks, as profits are limited to the premiums paid and losses can potentially be larger than expected.
*Shaun Murison is a market analyst at IG.
This article was originally published on 20 June 2016 and was updated on 21 June 2016.
