Steen Jakobsen
The Bank of Japan has abandoned quantitative easing and the European Central Bank may taper its bond-buying programme, so what is the role of central banks in 2017, asks Saxo Bank’s chief economist Steen Jakobsen.
Article / 16 June 2016 at 15:14 GMT

How a Brexit would play out: Jakobsen

Chief Economist & CIO / Saxo Bank
  • Brexit will send pound reeling, first plunge likely to 2016 lows
  • Ultimately, the scale of the move will come down to net positioning
  • 'Leave' will win, banks to massively underperform: Jakobsen
  • Large-scale 'event risks' usually spur movements in the 5% range
  • If post-Brexit rate cuts don't halt markets, it's 1992 all over again
  • For more on the UK referendum, click here for our Brexit page
And if Britain does decide to go its own way? Photo: iStock

By Steen Jakobsen

Today's edition of the Financial Times provides some very good input on the question all your clients are asking: "what will happen if Britain votes to Leave?"

Among their insights was the fact that, over the long term, GBPUSD has spent very little time below 1.40. Also? The 2016 low for this pair, hit when the Brexit vote was announced in February, was 1.3836. Could this be the goal of the pair's first post-Brexit run?

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Source: Saxo Bank

But what about my take?

There remains one full week to the UK's Brexit referendum, and the "move" will be dictated by the market's net positioning.

Stay with me here... If, as I expect, 'Leave' continues to gain ground, then the market will dynamically hedge more. From a risk perspective, then, the best case would be one in which polls and bookmakers allotted a higher probability to 'Leave'.

If 'Leave' marches forward, then one week from now GBPUSD will be in range between 1.36 and 1.41, and to the lower end of that range as well.

Conversely, if 'Remain' gains some ground then we will go into next Thursday in the 1.40-45 range.

The main risk now, then, is the gap between financial markets, bookmakers, and politicians who all (mistakenly) maintain that 'Remain' will prevail come referendum day. The reality is that for each "undecided" who takes a side, two of three are going to the 'Leave' camp – hence the improvement in its polls.

On the day, the real question of import is the policy response from the Bank of England and the European Central Bank. If the FTSE or the GBP gap down by more than 5% or so, we will see rates cut by at least 25 basis points, if not 50, and unlimited liquidity from the ECB and the US Federal Reserve.

What happens post- a BoE cut is the "main catalyst". If cutting rates does not stop the market, then we are in a 1992-type scenario.
The Bank of England

It is not as if the Bank of England hasn't been broken before. Photo: iStock

The most likely scenario?

  • Polls: 'Leave' will continue to pull ahead, forcing bookmakers' to cut their odds to 50/50.
  • GBP: As the polling data come to reflect increasing nervousness, sterling will continue its slide towards 1.38 (versus the US dollar).
  • FTSE: The benchmark index will outperform in terms of the weaker pound, but overall down.
  • Banks: Massive underperformance here.
  • Vote: 'Leave' will win.
  • June 24 Opening bell: GBP is down 5% on the open, then returns to a 1% drop on the day; the FTSE opens down 5% and buying comes in once the BoE cuts rates.
If Britain votes 'Remain', then historically the "propensity" of moves is 1:2 or 1:3; i.e. if you expect a 10% range if 'No', then 'Yes' should see you up 3-5%.

Finally, I've seen my share of "event risks"– 1992, 1998, 2000, 9/11, the London and Madrid bombings, et cetera...

Here are the "lessons" I have learned:

  • The market generally drops by a maximum of 5%. This was even the case on 9/11, which saw markets closed for more than a week.
  • It generally rebalances, if not inside 24 hours then certainly inside 72. This means the risk is managing the much larger intraday moves. The day-to-day risk is much, much smaller than the intraday risk.

Of course, the above is just my experience and my perception – this is only guidance.

Event horizons
Event risks are not necessarily event horizons. Photo: iStock

— Edited by Michael McKenna

Steen Jakobsen is chief economist and CIO at Saxo Bank
16 June
buelte buelte
Thanks for voicing your experience in guidance - much appreciated. Opinonated contributions after today's sad event would not have been helpful, i guess.
17 June
Philidor Philidor
5% is quite a conservative prediction, comparing to other sources.

Quick question: "June 24 opening bell" - I was under the impression that GBP crosses will be trading as normal during the count?
17 June
Steen Jakobsen Steen Jakobsen
More pointing to the fact the result will be out 2 a.m ...
20 June
Maher Maher
Thanks Steen, sorry for the silly question. why would BoE slash rates if sterling started to dive. would have thought opposite particularly with potential inflationary pressures of a much lower pound


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