Forex Market News | Saturday 25th June, 2016
In the lead up to today’s long-awaited UK Referendum, we had suggested that fierce campaigning on both sides of the vote, combined with expanded open interest in British Pound positioning could lead to wide price swings in the Asian trading session. As liquidity flows constricted and price spreads widened after the UK polls closed, FX traders were content to keep the major pairs within the NY closing ranges.
One-by-one the official results were posted from the 382 voting stations and the financial markets responded accordingly. Within the first hour and after 40 districts reported, both the “Leave” and “Remain” enjoyed brief margins over the other with the GBP/USD trading between 1.5000 and 1.4950.
However, when the results from the Sunderland and Yorkshire districts showed a surprising majority of Leave votes, it spurred a dramatic risk-off move throughout the capital markets as it became evident that the “Brexit” could win regions which polled strongly for the “Remain” vote. The USD, JPY and gold soared and equities and the GBP sold off hard. Core bond yields in the US and Europe fell sharply.
The GBP/USD fell to the 1.3230 level during the Asian session, which is the lowest level since 1985. As the final results became official, markets began to stabilize. Reports of currency intervention from the Swiss National bank lifted the USD/CHF off the .9550 low, while the Bank of Japan sat idle and watched the USD/JPY crash to a three-year low of 99.00 before recovering back over 102.00.
It’s reasonable to expect price volatility levels to remain heightened over the next few sessions as both investors and policymakers are considering the far reaching implications of exercising the Article 50 exit protocol; which could lead to a two-year negotiation period between the UK and the EU.
Many UK politicians and business leaders warned of a severe write down of the GBP and other UK assets if the “leave” vote won. And while that has certainly been the case today, we see two potential developments which could minimize the fallout and stabilize the UK market sooner than the consensus.
The first is that PM David Cameron has effectively resigned, which means he won’t be part of the political team who will be negotiating the exit agreement with the EU policymakers. It’s likely that new representatives, who supported the “Brexit”, will show more initiative to securing a agreement quickly.
The second is that the UK exit will likely embolden the nationalist movements in other countries which could deflect attention away from UK decision. Anti-EU parties in France and Italy have are now calling for their own referendum and this weekend’s election in Spain could also increase pro-sovereignty seats in their parliament.
On balance, it was clear that the independent polls, media outlets and even the bookmakers underestimated the potential for a “Brexit” victory today. It’s also clear that today’s epic market moves throughout the major Foreign Exchange pairs will take a few sessions to smooth out and regain some degree of harmonic patterns.
As such, we suggest staying on the sidelines again today.
Our research team will review the charts and crunch the numbers over the weekend to see if there are any trade set-ups for Monday’s session.