With the FOMC out of the way, the “Brexit” debate remains the dominant driver of asset prices today.
The assassination of pro-EU MP Jo Cox, has forced a suspension of campaigning for next week’s UK referendum, yet we anticipate this weekend to be filled with heated debate, as the realization that the proverbial “clock” is now on the field. Shifting market expectations for Brexit is now a daily occurrence and we expect the noise to reach deafening levels next week. Yet, barring ironclad polling evidence of a directional outcome, we suspect investors will view the vote as coin toss. Intraday volatility, indicated by a surge in GBP option premiums, will likely remain elevated but we suspect that positioning close of Friday will last until morning of Thursday 23rd.
We remain focused on a “leave” vote since that will likely have the most profound and confusing effect on currency prices. Our primary trades on a “leave” vote would be short GBPJPY and short EURCHF. Both the UK and Europe stand to lose should their relationship deteriorate with the possibility of the single currency rising above the sterling.
Second tier trades would be focused on selling currencies with significant exposure to trade with both nations as we anticipate a contraction in growth due to immediate uncertainties. This puts NOK, PLN and SEK at risk. In this current scenario, we doubt counter factors such as safe-haven status and correlation to oil prices will protect SEK and NOK from an immediate sell-off. Finally, we are focused on global risk sensitively where MXN, TRY and ZAR look to be the most vulnerable to a risk-off result. ZARJPY remains below its 21d MA at 6.8485, suggesting a test of the 6.5247 2016 low. As we have stated before on the long side nothing clever but traditional safe-haven USD, JPY and CHF. However, a fear of “Brexit” has once again put bitcoin/cryptocurrencies back in the spotlight. Bitcoin against USD has surged to 777.01 (bitcoin/sterling 519), representing a two-year high. Cryptocurrencies in theory are the only pure way of escaping the manipulation of fiat currencies, and avoiding the potential distortion caused by central banks in the post UK vote environment. Although this option is more relevant for smaller retail rather than larger institutions due to liquidity.
Peter Rosenstreich - Head of Market Strategy - Swissquote
Yann Quelenn - Analyst - Swissquote