Article / 20 June 2016 at 8:26 GMT

From the Floor: Brexit tilt derails gold juggernaut

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  • Gold rally falters after Brexit polls tilt towards 'Remain'
  • Gold set for consolidation in $1,271-300/oz range — Hansen
  • Gold "excitement" could revive as Brexit only part of the rally cocktail — Hansen
  • GBPUSD sparks to 1.46 area as vols decline from elevated levels — Norup
  • Bremain tilt hits yen, dollar, bunds but result still "very uncertain" — Hardy
  • Fed's "very shaky" Yellen to give semiannual testimony Tuesday — Hardy
  • Apple patent row in China points to "troubles" ahead — Garnry


By Martin O'Rourke

Gold derailed

A headlining tilt in the Brexit referendum campaign towards a 'Remain' vote has  derailed the gold juggernaut just three days before this Thursday's referendum and brought the precious metal back to sub-$1,300/oz levels.

Gold had peaked at $1,312/oz Thursday, but was at $1,282/oz at 0655 GMT.

"Gold is probably settling into a $1,271-300/oz range and it will need to break back above the $1,300/oz level to rekindle some of the bullish excitement of last week", says Saxo Bank's head of commodities strategy Ole Hansen. "But there are multiple things to focus on here with gold and Brexit is only one of these".

"Less than half the original rally was due to Brexit", says Hansen speaking from the Copenhagen floor. "The original rally was set off by the weak jobs report and then given a further boost by the dovish Federal Open Market Committee meeting".

Singapore-based trader Edmund Liu also brands the current move in the precious metal as "a healthy correction" and envisages the referendum on Thursday as broadly supportive to yet more strength in gold. "We believe the precious metal will continue to strengthen in both Brexit and Bremain scenarios", he says.

The gold speculative position is at a near record following the two-week surge in demand.

Gold support is at $1,271/oz and $1,258/oz, but a break above $1,300/oz could be more likely

GBP surges

Beleaguered and battered sterling rose seemingly Lazarus-style from its deathbed Monday for a near 300 pips move against USD to stretch up and beyond 1.46, as the Bremain tilt helped stir sterling bulls from hibernation.

Sterling had dipped below 1.41 on Thursday.

Not surprisingly, the spot movement had a sharp knock-on effect on FX Options with "at-the-money volatilities lower across the board", reports Jeppe Norop from the Copenhagen desk.

EURUSD one-month at-the-money vols fell one full percentage point and there was a selloff in cable vols that sent it down from 27% to 24%, says Norup. "This was entirely driven by the Bremain polls", he says, but adds that overnight forward vols remain highly elevated at 118%, down from 140%.

Saxo Bank's head of forex strategy John J Hardy warns that the headline-grabbing nature of the Bremain tilt may not be all that it seems.

"What the polls show is that there has been a fall in the 'Leave' side but that a lot of these have shifted into the 'Undecideds'", says Hardy. "We're still at 44-to-44% and this is still a very uncertain outcome".

"There is going to be a very large potential reaction to this vote especially in the event of a Brexit", he says. "For now it's all about risk-on, risk off and everything is highly correlated to that".

That helped the likes of AUD and NZD rise but both yen and dollar were weakened amid the ongoing Brexit confusion.

Bunds were another Bremain-tilt victim as a selloff ensured the 10-year German bund yield returned to positive territory, says Michael Boye from the fixed income desk.

Boye meanwhile adds that the 'Remain' shift opens up the possibility for a sharp correction on the iTraxx Crossover which faces a 20 basis points correction to 350 this morning.

"If Britain remains in the European Union, there is a potential retracement here all the way down to 300", he says.

Shaking Yellen

Janet Yellen goes before a key senate committee Tuesday and amid all the Brexit hullabaloo, Hardy warns that the recently "very shaky" Fed chair needs a performance in the semiannual monetary report if for no other reason than to re-establish her authority and give the dollar a helping hand.

"This is actually a key week for the Fed", says Hardy. "We've seen a very shaky Yellen and while the market reaction won't be immediate because of the Brexit, the market will react to the dollar eventually on the Yellen testimony".

"The market is concerned that the US economy is tilting towards recession and the Fed is generally clueless", he says.

Equities rebound

There has been something of a rebound in equities, but Saxo Bank's head of equities strategy Peter Garnry warns traders that "the most wise thing to do would be to keep net exposure limited ahead of Brexit".

"It's worth noting that rates on borrowing between global banks and on FX swaps into dollars are at very elevated levels", he says. "It seems almost like an overreaction on equities to the latest polls".

Garnry still likes Spain's Inditex and has also taken out a long position on the Nikkei premised on a Bremain win and a subsequent slide in JPY that ought to give the export-led Japanese standard bearer a lift.

And finally...

Apple's beleaguered business in China shows absolutely no sign of turning a corner as the technology giant became embroiled in a patent row this weekend.

Garnry is shorting Apple and adds: "I don't think the trouble for Apple in China is over".

Have you taken part in Saxo Bank’s Brexit poll?
What do you think will be the outcome of Thursday’s pivotal vote?
Vote now in Saxo’s Brexit poll on our dedicated Brexit pages.


Apple is embroiled in a patent row in China. Photo: iStock

Martin O'Rourke is managing editor at Saxo Bank

Editor’s note: From the Floor takes advantage of's unique real-time access to Saxo Bank’s various trading desks around the globe to put our community in touch with the developments that matter to their portfolios.

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