James Kim@Saxo
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Article / 17 June 2016 at 14:41 GMT

In the eye of the Brexit hurricane

FX Trade Strategist /
  • Canadian CPI declines but Loonie unfazed
  • FX markets trying to forget Thursday
  • Brexit storm clouds brewing
v Get to those desks lads, it's going to be a busy week. Photo: iStock

By Michael O'Neill

FX traders have only one-thing on their minds (well two, if you count after work drinks) and that is Brexit. The apparent unwinding of bearish Brexit trades following the awful murder of a pro-Remain politician, may just be wishful thinking. Volatility will return as soon as fresh polls become available especially if the Leave side is ahead.  

Traders know what to expect if the Remain camp wins, but no one knows what will happen if the UK elects to leave the EU. To say that GBPUSD will decline is a no-brainer but what about the collateral damage?  Will the remaining EU nations lock arms in solidarity or will some use the crisis to negotiate a better deal for themselves? 

One thing is for sure and that is liquid capital will seek safe havens. Canada, anyone?

Conscious uncoupling

Gwyneth Paltrow described ending her marriage to Coldplay’s Chris Martin, as conscious uncoupling, which is a gobbley-goop term that means divorce. The Loonie and WTI are experiencing their own version of conscious uncoupling. USDCAD has collapsed hand in hand with plummeting WTI prices. That is a rare occurrence and unlikely to be sustained.

Then again, maybe not.

If the June 16 Canadian dollar and WTI price swings are viewed as an anomaly, today’s price action points to a relationship that is back in harmony. WTI prices have risen from an overnight low of $45.82/barrel to $47.30/b, coinciding with a USDCAD decline from 1.2966 to a low of 1.2875.

It is a bit of a stretch but if the June 16 price action is ignored, the WTI floor of $47.00/b remains intact as does the USDCAD cap at 1.2960.

Unfortunately, next week’s UK referendum will put the boots to this theory. If the Leave side wins, it will be nasty. If the Remain side prevails, all the price action of the past couple of weeks will be meaningless and USDCAD and oil markets will revert to being concerned about supply/demand and the Federal Reserve.

USDCAD and oil noting uncoupling and recoupling

usdcad oil
 Source: Saxo Bank

VIX index climbs - no surprise there

The VIX index (Volatility Index) which is the Chicago Board Options Exchange measure of expectations of 30-day volatility had been extremely sedate since mid-March. Last week, it awoke from its slumber, coinciding with both Janet Yellen’s speech assuring markets that a rate hike may be appropriate in “coming months and Brexit polls giving the Leave side a lead.

The VIX gapped higher, rising from 12.66 on June 6 to 22.80 Friday morning but has since drifted lower. The move above the 16.80-17.0 suggests that further gains to the January peak of 32.11 are possible. A Brexit Leave win could put the August 24, 2015 peak of 53.34 in play which occurred when China’s equity markets collapsed.

Volatility Index wakes from its slumber
Source: Saxo Bank  

The week ahead

Normally, the sheer volatility and excitement seen this week would be hard to top in the following week. But these aren’t normal times. Next week, Brexit polls will ramp up the “fear quotient” which many traders will use as an excuse to head for the sidelines, in an effort to preserve capital.

In that environment, liquidity will become scarce and encourage wild price swings. Regional economic data releases may have a bit of impact but will be overshadowed by the 800 lb Brexit gorilla. There aren’t any top-tier economic data releases from the US.
The week that was

This week had it all; volatility, drama, mayhem and murder and that was just in the UK. The Federal Open Market Committee meeting results rippled across asset classes and oil prices collapsed.

Monday kicked off with the stench of the weak US nonfarm payrolls report overhanging FX markets, although Australia traders didn’t notice as they had the day off. Risk aversion sentiment picked up following China Industrial Production and Retail Sales data. USDJPY tanked. 

In Europe, GBPUSD tanked on poll results showing the “leave” side with a commanding lead. FX trading was very choppy during the New York session. European dollar weakness turned into New York dollar strength but most of those gains were reversed by the end of the day. Oil prices road a roller-coaster but closed with a bearish bias.

Tuesday’s Asia session continued the risk-off theme. USDJPY traded modestly lower, in part due to safe-haven demand and in part because some traders believe that additional monetary policy stimulus could be announced at Thursday’s BoJ meeting. For the record, it wasn’t.  

GBPUSD headed back to Monday’s lows when the UK’s biggest circulation tabloid announced support for the “Leave” camp. EURUSD which had flat-lined in Asia sank in Europe due to position adjustments ahead of Wednesday’s FOMC meeting. Better-than-expected US retail sales data only had a minimal and fleeting impact. WTI oil prices probed support at $48.00/b when the American Petroleum Institute reported a build in the weekly Crude Stocks change report.

Wednesday was all about the FOMC meeting. In Asia, AUDUSD rallied but those gains were given back ahead of the Fed. FX markets were mostly subdued until the Fed announced no change in rates and downgraded GDP and the rate hike outlook. Brexit concerns were cited as one factor in the decision. Yen traders shrugged while EURUSD had a short lived rally. WTI prices peaked pre-FOMC and then started to slide. By the end of the New York session, the dollar was lower vs the majors except for yen.

Thursday, the Bank of Japan kicked off a wild day in FX markets. The BoJ left rates unchanged, did not provide any stimulus measures and injected Brexit fears into the equation. Before you could say “safe-haven” USDJPY tanked and the US dollar soared as risk-aversion spread

Europe and New York. And that’s when it got silly. Around mid-morning, coinciding with the news of the murder of a Remain backing UK Labour MP, US dollar buyers became rabid US dollar sellers. When the dust had settled, the US dollar had lost all, and in some cases, even more of the earlier gains.

Friday, the US dollar continued to slide except against yen and sterling in a bout of position squaring ahead of the weekend.


Time to convert your yen into dollar if you're planning that foreign trip. Photo: istock

- Edited by Martin O'Rourke

Michael O'Neill is an FX consultant at IFXA Ltd
John Shaw John  Shaw
Thank you very much for sharing Mike.
Gunna be a fun week next week.
If Brits were smart, they would vote "YES \ LEAVE" to GTFO of that mess called the EU and maintain some form of control of their own destiny. The EU is a bureaucratic, dictatorial mess of a monster that just keeps growing and is always behind the curve. Reactive. Never proactive.
Could bounce the Loonie around but I can't see the Loonie tanking much but I am not an expert on "the crosses" like you are.
Have an awesome weekend bud.
HindustanForex HindustanForex
All the Brexit updates in one place
Is your broker Brexit ready? Some brokers are changing margins also for the euro


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