Article / 24 June 2016 at 7:14 GMT

FX Update: We have Brexit

Head of FX Strategy / Saxo Bank
  • Europe awakes to harsh reality of a resounding Brexit
  • Expectations that marginal voters would stick to status quo proved wrong
  • GBPUSD at 1.3500 was taken out in new generational low not seen since 1985
  • Looking at 1.3800-1.4000 as key resistance zone for GBPUSD today
  • Central banks are likely already intervening

Rainy London
 Markets suffered a train wreck as Britons voted to leave 
the European Union. Photo: iStock

By John J Hardy

One of the most remarkable 24 hours in market history are in the bag, after risk appetite and sterling screamed higher ahead of the UK referendum expecting a Bremain vote, only to encounter the harsh reality of a resounding Brexit. A couple of takeaways: 

  • There was an expectation from a behavioural perspective, judging from key votes in the past, such as the Quebec and Scottish independence referendums, that the marginal voter would default to the status quo. That was emphatically not the case this time around and speaks to the risk surrounding future EU-related popular votes as well perhaps to the US presidential election. Central bank and policymaker extend and pretend is feeding revulsion to the status quo – that’s perhaps the most profound takeaway. It’s also a strong rejection of globalisation. 

  • There will be a strong official response, and central banks are likely already intervening, so there are significant two-way risks on the day, meaning that traders may want to take a reactive stance to developments. The BoE could cut rates by the time you are reading this, for example, and UK PM Cameron is out speaking before pixel time for this post. 

  • The technical key from here will be how we settle on the day and into early next week, as we still need to reserve judgement and have a look at daily closes before we can trust the initial reaction’s potential to follow through (some thoughts on levels below). 

Besides all of this, the medium to longer term could mean a very drawn out renegotiation of the UK/EU relationship (under Article 50 of the Lisbon Treaty ( , the UK and EU have up to two years to renegotiate a new treaty, so a Brexit could mean something far from the black/white expectations of in/out that today’s results brings.

One pair to reverse considerably from the extremes has been EURGBP, and one of our points of interest going forward will be the degree to which the Brexit feeds an EU existential crisis. Signs of this are already evident in a tremendous widening of peripheral bond spreads. If the pair is able to fully reverse this result and close below perhaps 0.7900, the bears will have a compelling case. Otherwise, if the euro retains the upper hand, the next focus point is 0.8375 and then possibly 0.8700.
The G-10 rundown

USD – serving as a safe haven second to the JPY but ahead of the Swiss franc so far. If risk appetite remains in the doldrums, the dovish Fed is less likely to have an impact.

EUR – surprised that EURUSD is managing to pick itself up off the mat at all – judging the 1.10-1.1100 zone as the key resistance area if we’re to see euro weakness on new existential worries overwhelm . As this is being written, the Spanish 10-year - German 10-year sovereign yield spread has vaulted to its highest level at 180 basis points since early 2014.

JPY – judging from price action only, we have seen some intervention in USDJPY overnight, or at least strong fear of intervention, with 100.00 an obviously important level, though the price action did slip to 99.00 at one point. How determined is the Bank of Japan if the pressure continues? Quite, most likely.

CHF – EURCHF plunging to a 1.0625 area low on safe haven seeking, with the next focus coming in at 1.0500. 1.0800 is the resistance. An interesting test in the coming days/weeks on the quality of the CHF safe haven.

GBP – GBPUSD at 1.3500 was taken out this morning in a new generational low not seen since 1985 (where the low was 1.0520), but it has rebounded back above that level. Looking at 1.3800-1.4000 as the key resistance zone for the pair on the day.

AUD – a clear correlation with the risk appetite and the zone near 0.7600 was a key resistance area anyway, so this firmly sets the focus back lower from here, as long as it continues to close below perhaps 0.7450.

NZD – ditto AUD comments, though both need to hold the lower closes today and see follow-up early next week to trust the reaction to this event.

CAD – clearly correlated with risk appetite, but with less beta than the other commodity currencies. Watching whether oil continues to correlate with risk appetite and whether USDCAD holds important 1.3000 through all of this for further upside potential.

SEK – A tremendous rally overnight on poor liquidity – see NOK comment below.

NOK - Interesting to see whether small currency, liquidity considerations see EURNOK upside, or whether EU existential fears actually see safe haven seeking in the Scandies eventually – watching today’s close for whether we reverse the EURNOK rally.

Upcoming Economic Calendar Highlights (all times GMT)
  • Germany Jul. IFO Business Climate (0800) 
  • US May Durable Goods Orders (1230) 
  • US Jun. Final University of Michigan Sentiment (1400) 

— Edited by John Acher

John J Hardy is head of FX strategy at Saxo Bank 

24 June
Clare MacCarthy Clare MacCarthy
This comment has been redacted
24 June
Clare MacCarthy Clare MacCarthy
"The British people have voted to leave and their will must be respected," David Cameron, 0721 GMT, June 24, 2016.
24 June
Lilith Lilith
I am afarid every single advise I listened from your comments has not realised.


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