All eyes on the prize as pound takes cen­tre stage

Financial Mirror (Cyprus) - - FRONT PAGE -

On Thurs­day, June 23, Bri­tain will vote on whether to re­main part of the Euro­pean Union. This his­toric plebiscite is per­haps the most im­por­tant for the UK in decades. A re­cent se­ries of polls in­di­cates that the ‘re­main’ camp is gain­ing mo­men­tum over those wish­ing to leave the Euro­pean Union. How­ever, cur­rency traders re­main deeply con­cerned about the im­pact of the up­com­ing Brexit ref­er­en­dum on the GBP, and the costs as­so­ci­ated with in­sur­ing busi­nesses in this highly volatile en­vi­ron­ment. The general rule as it per­tains to the GBP vis-à-vis the Brexit, is as fol­lows: any in­di­ca­tions that Bri­tain is lean­ing to­wards an exit from the EU will drive up volatil­ity with the GBP and bring about a de­pre­ci­a­tion of the sterling.

The up­com­ing ref­er­en­dum has re­sulted in grow­ing concern about the sta­bil­ity of the GBP in the lead up to the his­toric vote. In­creased lev­els of trad­ing ac­tiv­ity on the sterling op­tions mar­kets have re­sulted, and cur­rency traders are cau­tiously eye­ing Brexit polls for in­di­ca­tions about which way the vote is likely to go. The most re­cent polls in­di­cate that the ‘re­main’ camp is open­ing up a healthy lead over those want­ing to leave the Euro­pean Union. On Satur­day, May 21, a poll was pub­lished by Opinium un­der con­tract to the Ob­server news­pa­per. This was the sixth of seven polls in­di­cat­ing that Bri­tons wish to re­main part of the UK. This lat­est poll placed a ‘re­main’ per­cent­age of 44% ver­sus those who wish to break from the Euro­pean Union at 40%. It is in­ter­est­ing that the ‘re­main’ camp has in­creased its lead by 2% from the same poll con­ducted at the end of April.

Var­i­ous book­mak­ers and spread bet­ting com­pa­nies across the U.K. have also seen tremen­dous lev­els of ac­tiv­ity with the up­com­ing Brexit vote. As it stands, the wa­gers are firmly in favour of Bri­tain re­main­ing part of the Euro­pean Union. For ex­am­ple, Lad­brokes and Wil­liam Hill has Bri­tain re­main­ing in the EU with odds of 1:6. This means that for ev­ery GBP 6 wa­gered, hun­ters will re­ceive 1 pound in profit. Sim­ply put, this in­di­cates that the over­whelm­ing ma­jor­ity of wa­gers placed at spread bet­ting sites favour the UK re­main­ing part of the Union. Spread bet­ting sites are pre­sent­ing cur­rency traders and fi­nan­cial an­a­lysts with an al­ter­na­tive to Brexit polls be­ing con­ducted by ma­jor news­pa­pers and gov­ern­ment bod­ies. In fact, many fi­nan­cial an­a­lysts trust the spread bet­ting per­cent­ages more than the poll­sters. One of the ma­jor changes that has taken place with Brexit polling is that con­ser­va­tive vot­ers have swung from want­ing to break with the EU to re­main as part of the EU. An­other im­por­tant fac­tor for Bri­tain’s mem­ber­ship of the EU came in the form of the G7 in­dus­trial na­tions that unan­i­mously adopted the stance that they want Bri­tain to re­main part of the Euro­pean Union.

One of the most im­por­tant mea­sures of the GBP is im­plied volatil­ity. This mea­sure gauges mar­ket sen­ti­ment as it per­tains to the GBP and its move­ments in the lead up to the Brexit ref­er­en­dum on June 23. In­ter­est­ingly enough, the im­plied volatil­ity of the GBP has in­creased for the three months lead­ing up to the ref­er­en­dum. By March 23, the 3month im­plied volatil­ity in­creased to 14.93% from just 11.08% on March 21. If we take into ac­count the 2-month volatil­ity, that in­creased from 10.98% on April 22 to 13.88% on April 26. Im­plied volatil­ity is one of the most im­por­tant gauges of sen­ti­ment and cur­rency strength and an­a­lysts take it se­ri­ously. Nat­u­rally the most sig­nif­i­cant changes will be seen in the sharp uptick, or re­duc­tion of im­plied volatil­ity in the 1-month lead up to the Brexit vote. Im­plied volatil­ity is less af­fected by opin­ion polls then it is by move­ments in the ex­change rate vis-à-vis the Bri­tish pound. Var­i­ous high­rank­ing port­fo­lio man­agers now as­sume that the like­li­hood of a Brexit has de­creased to just 20%. Im­plied volatil­ity, if it de­creases, will nat­u­rally be good news for the GBP and caused the pound to rally. rate against its most im­por­tant part­ners: GBP/USD at 1.4509, GBP/AUD at 2.0103, GBP/EUR at 1.2930, GBP/JPY at 159.8021 and GBP/CAD at 1.9023.

In all in­stances, the value of the sterling has risen sharply against its cur­rency trad­ing part­ner be­cause of the sen­ti­ment ex­pressed in opin­ion polls and at book­mak­ers. The big thing about a Brexit vote is the un­cer­tainty it cre­ates.

Most the un­cer­tainty will man­i­fest in the way in­vestors re­act to it on stock mar­kets, with cap­i­tal in­vest­ments in the UK and with house­hold pur­chases in the UK.

If there is a great de­gree of un­cer­tainty about which way the vote will go, house­holds will gen­er­ally de­fer big-ticket in­vest­ments in prop­erty, pur­chases of as­sets like ve­hi­cles and ex­trav­a­gant spend­ing.

On the cor­po­rate side, we are likely to see a re­duc­tion in cap­i­tal in­vest­ments, per­haps even a de­fer­ment un­til af­ter things have calmed down.

Equity mar­kets in the UK are likely to re­act in much the same way, with re­duced lev­els of in­vest­ments as long as sen­ti­ment re­mains shaky. Anx­i­ety is per­sona non grata when it comes to eq­ui­ties mar­kets and a risk-off ap­proach tends to be adopted.

If we stick with the poll num­bers alone, then it looks cer­tain that the risks in­her­ent in a Brexit out­weigh the ben­e­fits promised by it. But more im­por­tantly if the UK votes for a Brexit, Lon­don will lose its ex­clu­sive sta­tus as the cen­tre for all euro fi­nan­cial trans­ac­tions. And that is some­thing that the UK can ill af­ford, and Bri­tons too will fight hard to pre­vent that from hap­pen­ing.

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