June 24th 2016: Pound Plunges to 30 Year Low as UK Votes Brexit

• The UK has defied opinion polls and is projected to formally vote for to leave the European Union. In a re-run of the general election, pollsters appear to have underestimated the voting power of the older generation who were far more likely to turn out and vote. The younger generation it seems were vociferous on social media, but were significantly less likely to cast their vote. The result not only blind sided pollsters though, financial and betting markets have been caught unawares.
• Global markets have reacted, but  the epicentre of this earthquake is sterling. The pound is experiencing record one day declines, falling to its lowest level for over 30 years. GBP/ JPY -14%, GBP/ USD -10% & EUR/ GBP +6%.

• Away from the pound, there has been a general flight to quality, with the dollar index rallying to its highest levels for the year and yen pairs sinking even further.

• Even loosely connected currencies such as the Australian dollar have been impacted with a major reversal on the AUD/ USD and AUD/ JPY.

• Gold, the world’s favourite safe harbour has rallied hard against the US dollar.

• There are planned economic items throughout the day, but everything will pail in comparison to the Brexit reaction.
• German Ifo Business Climate is released at 09.00.
• US core durable goods follow at 13.30, with revised UoM consumer sentiment at 15.00.

Trade Idea: 

• So what next? If the UK government’s projections are anything to go by, the UK has just chosen the fast track to economic oblivion. This is not necessarily going to happen though. Economists have missed many of the major crises in recent years, economics is after all an imprecise science involving human actors. Therefore, there is a real possibility that the UK might recover from this position quicker than expected. How much of the UK’s economy is driven by being part of the EU compared to being part of the European continent is an important distinction that has not been clearly been answered.
• The biggest danger with Brexit has always been the uncertainty – If there’s one thing that markets hate more than anything else it is uncertainty. The last time the UK experienced something along these lines was ‘Black Wednesday’ on exit from the ERM in the 1990s. This occasion saw sharp falls in the pound not just over a week, but with follow on selling over the rest of the year. It took over 6 months for the pound to bottom out. Some would argue that this period should have been called ‘golden wednesday’ as the resulting devaluation brought about a competitive advantage to UK manufacturers. This time around, the UK economy is in a better position and the pound was not coming from such an oversold position.
• The optimistic case is that the uncertainty will pass as families and traders slowly return to their day to day lives. Businesses will continue to trade and cross border transactions will continue. After all, trade is primarily a business to business and person to person affair at its heart. The pessimistic case is that the resulting uncertainty will translate into a shock recession, that is a sense self fulfilling.
• My personal view is that the UK will be ok in the medium to long term. The economic warnings about Brexit were probably exaggerated and the UK will survive and adjust. This process will take years though and betting on further downside over coming weeks may pay off, with numerous twists and turns until bottoming out in 12-18 months time.
• Please keep checking our website for updates on our trading conditions as we allow markets to settle.

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