Article / 23 June 2016 at 8:50 GMT

From the Floor: 'Don't be smart' on Brexit day

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  • Uncertain outcome of UK's EU referendum legislates against risk — Garnry
  • GBPUSD bouncing back towards year highs as polls show 'Bremain' bias
  • GBPUSD could rise to 1.50-52 and "spike even higher" on 'Bremain' — Hardy
  • Market will begin to react overnight as results filter through
  • Overnight GBPUSD vols spike to 125%, 10 times pre-NFP levels — Bechmann
  • EURUSD to slide towards 1.09 immediately if there is a Brexit — Hardy
  • Gold settling into $1,254-72/oz range ahead of result — Hansen
  • Outcome to see significant move in bonds, XOVER — Boye


By Martin O'Rourke

Rein it in

It's quite possibly tempting to look at the potential scenarios for the UK vote on EU membership today and think this or that could be worth a flutter, but Saxo Bank's head of equities Peter Garnry warns against getting carried away.

"This is a day for keeping a low exposure", he says. "We're hedging all of our long bets and we feel comfortable in our neutral position".

"Don't be smart with less than 24 hours to go until the outcome".

Garnry adds that risk is skewed to the downside in the event of a Brexit, citing the Dax as vulnerable to a return to the 9,500 level for example, which it came close to breaching one week ago. Dax closed Thursday at 10,071.06.

"We won't have the same kind of margin to the upside if we don't get a Brexit", says the equities chief.

Bonds are also in 'will-they, won't-they' mode with a Bremain offering very little upside but a Brexit threatening all sorts of bedlam, reports Michael Boye from the fixed income desk in Copenhagen.

"If it is Bremain, we could see a 10-20 basis points move on the XOVER Index and a move in 10-year German bunds to around 164", says Boye. "A Brexit would see bunds break through 165.50 and a 50+ points move on XOVER with little or or no bid-side liquidity".

A Brexit could see German 10-year yields return to negative territoryh

Sterling coiled

Sterling rose to a 2016 record high overnight at 1.4844 and was frothing below the 1.48 mark in an attempt to strike back higher in the hour following the European open, seemingly fuelled by a tilt towards a Bremain vote. The tilt, nevertheless, seems to be a market-consensus led bias rather than an actual representation of the latest polls which continue to have it on a knife's edge.

If it is a Bremain, says head of forex strategy John J Hardy, expect GBPUSD to hit the 1.50-52 area "with the possibility to go even higher".

"The markets should begin reacting sometime after 1130 GMT as the results start to filter through", says Hardy. "According to the FT, we might have a clear idea how this is going to go by 2.30 am".

If there is a Brexit, Hardy has his sights firmly fixed on EURUSD which, he says, "would be very risky for euro and would see a move immediately to 1.09".

"It will be very difficult in a Brexit scenario because of the high risk of volatility".

Various scenarios facing the key FX pairs ahead of Friday's EU referendum vote

Source: John J Hardy

Talking of volatilities, the FX options desk's Kresten Bechmann notes that overnight GBPUSD at-the-money volatilities are at 125%.

"The reaction to the downside if a Brexit is the outcome will be even more because the polls are moving towards a 'Stay' outcome making the risk reversals in the front-end sterling options so extreme", says Bechmann. "If you compare for example to the night before nonfarm payrolls, vols are typically at 12-13% so this is about ten times higher than usual".

"Another important factor to bear in mind is that the results will start to come in around midnight when volatility is at its lowest", warns Bechmann. "Cable a few days ago was moving in something like a 30-50 pips range but that could go to three or four big figures".

"The spreads are so extreme that we would tell people to wait before putting anything on now".

Centred gold

Gold has slipped into a comfortable $1,254-72/oz range ahead of the vote after last week's short-lived flirtation with the $1,300/oz plus area, but can expect some indirect impact from FX movements and risk-on/off moves over the next 24 hours, says Saxo Bank's chief of commodities Ole Hansen.

"We're looking for gold support to be established at $1,245/oz but the #VoteLeave risk premium has been virtually priced out", he says. "There is a relatively short-term hedge that looks relatively cheap with expiries on June 27".

"Gold one-month risk reversals are favouring calls by almost 3%, the highest since 2008", he adds.

And finally...

They've all said it in one form or another but let's be clear once again and emphatically state the message to be extremely careful out there today and tomorrow. Trading can be a rough business. As Garnry says, "don't be smart" on this of all days.


The clock's-a-ticking on the UK's great EU membership decision. 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.

23 June
Martin O'Rourke Martin O'Rourke
GBPUSD broke back above 1.48 at 0908 GMT and was at 1.4810 at 0911 GMT.
23 June
Martin O'Rourke Martin O'Rourke
GBPUSD hit an intraday high so far of 1.4938 but has slipped beneath 1.49 ahead of tomorrow's EU membership result. It was at 1.488 at 1244 GMT.


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