Brexit: cash in on the dead end at least?

While I'm sure you are inundated with news on the EU referendum, don't worry, I'll not disappoint ... I will give you something nothing else to think about.

This is probably one of the biggest risk events of my FX career taking shape and quite frankly, no one really has a clue how things will pan out should the British public vote Brexit. However, I'm going to attempt to look ahead and see what the aftermath of what such a decision could mean for the FX space. 

So here goes...

Day 1: Battered Sterling, fish and chips anyone?

Source: Free Images

In one of my previous posts I wrote what my verdict was. I did not see such a huge turn around coming in what I would say are marginal favouritism to the stay campaign from the weekend polls. 

Let me dig out what I predicted... Moving on from the Fed already ... back to Brexit ...

"Staying short sterling for the near-term, ("Well, that didn't work out and I blame the greenback more than I do sterling."), with a target of 1.2890 in cable on a break of 1.32/35 target (2009 lows) as a knee jerk reaction over the course of events of a Brexit, with an unlikely potential to go 1.2500 (16% drop) in aftermath of a Brexit with continued speculative short selling and subsequent momentum. Buy back either way so long as Fed stays put. A relief rally on a 'stay' outcome."

So, now we are with highs of 1.4782 from 1.4252 since I last checked in with you about Brexit on the 15th June leaving one with little to show from being short 1.46ish. However, while the recent polls have shown favoritism to the Bremain camp, looking at one poll in particular though, WhatUKThinks.eu, that actually gives more weight to the telephone polls, the result is set to be incredibly close when looking on the average share of the vote for ‘Leave' and ‘Remain' in the six most recent polls of voting intentions on the EU Referendum. 

So, perhaps we are still in for one hell of a ride this week and sterling is set for a battering on a Brexit vote with there being far less upside potential after a vote to 'Bremain'. While there is scope for the 1.30's and possible lower levels, for the rest of 2016, we should start to see some stability back in sterling and business as usual and once some kind of a deal is struck with the EU in the next couple of years, a weaker pound would have been a godsend in hindsight. 

Day 2 - A nightmare on Downing Street and redundancy letter Friday 

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With sterling on its knees, from large speculative shorts and real money leaving the UK, some foreign companies packing up and announcing their redundancies, it is going to be a grim day for many in the UK apart from those jubilant pro-Brexit campaigners and their arrangements of Union Jack flags hanging from house, office, pub and car windows while three million or so other EU nationals living in the UK are stuck on hold to advisory government department telephone lines panicking as to what this all means for them. 

The truth of the matter, no one actually knows and everyone will be looking to Downing Street for the answers. However, David Cameron, who is likely to announce his intentions to remain as Prime Minister will soon realize that his standing is without éclat and his conservative government consumed by infighting will have little respect left for him forcing him to resign gracefully. 

In the weeks that follow: Boris Johnson's triumph over Osborne and sterling keeps sinking on uncertainty over EU trade agreement

On Cameron's resignation, sterling tumbles again and there goes the 1.30's perhaps? The BoE are pulling out all the stops,  buying pounds from foreign reserves as Boris stumbles up to address the public from number 10 as the new Prime Minister of the UK having defeated George Osborne and tries to bring some positive clarity to the situation, explaining all of the benefits of the decision and how Britain will be better off while at the same time, keeping to his pledges that Britain would continue to enjoy free-trade with their neighboring EU friends. 

However, this cannot be the case should he also keep to his promise to the pro-Brexit campaigners that Britain will withdraw from the EU's laws on the “free movement of persons”, and once the public and Boris Johnson's party see through this flaw, as many of us already do, it will indeed be a nightmare on Downing Street and EUR/GBP edges higher as sterling drops some more. If Black Wednesday is anything to go by, Boris cannot count on the Germans, let alone the French, to be sympathetic when he goes begging for a decent deal from the EU. "EU law is EU law" is what Angela Merkel will tell Boris. 

Despite all of the negotiations, or there lack of, going on in the background, Britain will still look the same, people will still be working and living as normal, at least for the best part of the two years that Britain has to essentially arrange the 'divorce settlements' with the EU, but there will still remain a feeling of unease and uncertainty for months to come.  At the very least,  there is going to be a lengthy process of negotiating many aspects of the divorce settlement, and if Boris wishes to keep some sort of trade deal with the EU, then the chances are Britain is going to end up with something which will not be much different from what it already has.

BoE meeting July 14th: the return of Soros? 

Source: iStock

Markets will be turning to the BoE for some clarity on the economy. The first meeting is on the 14th of July. This may be too soon for the BoE to really have been able to gauge how the economy is likely to perform in the coming months and they could perhaps hold off from making any changes to their monetary policy.  

However, given their previous assessments on a Brexit, “through financial market and confidence channels, there are also risks of adverse spillovers to the global economy” if Britons vote in favor of a British exit, or “Brexit,” the BOE said in their previous meeting's minutes, they could decide to cut interest rates by 0.25% or even by 0.50%. However, such a decision could backfire as perceived by markets as the UK in a panic, and when that happens, markets can be very cruel just as they were to the BoE on Black Wednesday when the BoE increased interest rates to try and stabilize the pound. However, George Soros and speculators did indeed see that as a sign of weakness and piled into shorting the pound on an unprecedented scale. After all, the BoE has not got too long to wait until the Quarterly Inflation Report in August and it might be prudent of them to wait until then instead. 

Besides all of this, there are many other risks that the pound would face on the eventuality of a Brexit, from foreign direct investment flows being pulled in respect to the UK's current account deficit, global market intervention such as the BoJ defending USD/JPY and the greenback's safe haven status, to prolonged uncertainties over the UK's trade agreements with the EU and the potential of another Scottish referendum.  

Britain's got talent

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However, Britain has a history of robustness, economically and within its citizens. Britain is indeed one of the world's soundest countries, with one of the best standards of education, talent and entrepreneurism. While it has its pitfalls, so does the EU and should Britain decide to leave the EU, on the balance of scales and in time, I'm sure Britain will continue to be Great and the pound will come out of the wash shining once again, but it may take many years before Britain can fully unwind itself from the mammoth regulations of the EU and that in itself will be a costly task.

By the way...

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Just incase you didn't know, the UK government doesn't even have to pull the country out of the European Union if the public votes for a so-called Brexit on Thursday. The result of this week's referendum on EU membership is not even legally binding, in which case, at least it's been fun walk down the garden path to nowhere! Just ask the Dutch ... In which case, I just hope you made some money on shorting sterling!

Source: Free Images