Moving on from the Fed already ... back to Brexit ...

Today is all about Brexit and the Fed.

But, I am sticking to Brexit because the Fed is priced in and I am quite tired of hearing the same record played over and over again from the US economy and Yellen.

Do not get me wrong, I would love to be pleasantly surprised and see the Fed start to normalize rates, as that is what the US and global economy really does need, but they won't do it, certainly not today, but if they do it, sometime before the elections, then that will be the last time before they reverse course again and head back to infinity QE or even negative rates to try and keep the bubble from bursting and the stock market and economy artificially inflated.

Brexit: a timely excuse for the Fed for the rest of 2016?

We are just days away now from the EU referendum - That has come around quick!

It has already been quite a journey for sterling traders. Cable has been 1.4768 bid down to 1.4089 recent lows and marked 1.3834 the 2016 low on 28th Feb ( after HSBC issued one of the starkest warnings of the dire consequences from a Brexit vote and as cabinet ministers clashed over the legal strength of Britain's new deal with Europe). 

Last Friday showed us the largest fall in sterling though, of over 1.5% on the back of opinion polls tilted towards the leave campaign. Sterling has not really recovered this week, bought back at 1.4089 until just 1.4213 (well below 1.4659 June highs).

Source: Free Images

The BoE are likely to be getting very nervous and going over their plans of defence with a bitter reminder of Black Wednesday 1992 as sterling lost over 15% when the BoE subsequently had to keep the pound out of the ERM. Their only contingency plans can be to try and back-up the currency by buying pounds from foreign reserves in the event that markets rush to sell the pound while polls continue to favour a Brexit. 

The eventuality of such an event could see the pound completely floored no matter how hard the BoE try to prop it up, however, some of the forecasts that have said it could even drop as far as $1.10, a level not seen since 1985 when the miners' strike was in full swing, is a little fanciful in my opinion. 

Source: Free Images

Black Wednesday came about as the negotiations taking place were very much behind the scenes and while the cat was eventually let out of the bag, there was more of a sense of absolute panic in the markets due to the unexpected circumstances and it was only when the BoE gave in to the massive speculative flows that Sterling went into free-fall and fell out of the 12% ERM bracket. 

I would imagine that those who are predicting a Brexit are already hedged for such an event and part of the sell-side has been done in the lead into the referendum, with of course more to come on such a result and when markets get going the moves can be hard, move far and very fast.

However, there is still the risk speculators try to batter the pound, which is a very dangerous situation for the UK economy as there will be a long period of uncertainty that could be damaging. There have been cases and studies done that indicate a Brexit could be wiping out over a percent of GDP and in that event. A very weak pound would drive the costs of imports higher, potentially leading to high levels of inflation and harder living standards. The BoE could be caught between a recession, but the need to hike rates to curb risks of hyperinflation leading to a period of stagflation in the UK economy. However, I think this is all a little extreme as well.  

While a Brexit could pressure the UK's budget and current account deficits, I do not think it could do so to an extent that it would start to affect the UK's credit downgrades and should Britain leave Europe, while the pound would most likely weaken in the short-term. This could actually be beneficial as it would help stimulate trade and manufacturing. But a prolonged period of short selling of the pound could force the BoE to raise interest rates to discourage capital flight that would be damaging longer-term. However, even after a Brexit vote, investors will still  need to invest for their futures for the same reasons as they do and always have done,  so I don't see an outright collapse in the UK financial markets. 

Source: iStock

Sterling to crash 15% on a Brexit - How much money will you make on a Brexit?

Verdict: staying short sterling for the near-term, 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.