Cable Soars as Brexit Sentiment Turns

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Market Drivers June 20, 2016

Cable through 1.4600 on change in polls over the weekend
Kuroda – we are halfway to 2% inflation
Nikkei 2.34% Dax 3.25%
Oil $49/bbl
Gold $1290/oz.

Europe and Asia:
JPY Merch. Trade 269B vs. 113B
EUR GE PPI 0.4% vs. 0.3%

North America:
No data

Cable gapped higher at the start of Asian trade and never looked back after a series of polls over the weekend showed that the Remain side regained momentum in the upcoming Brexit referendum vote this Thursday.

A number of polls including those from YouGov, Survation Opinium all showed that the Remain vote was generally dead even or slightly ahead of the Leave vote – stark contrast from the week prior which saw the Leave vote jump to a 5% advantage.

There is no doubt that the murder of Labor MP Jo Cox was a massive blow to the Leave campaign not only because it suspended debate for 2 days but because the sheer horror of the act could have pushed many undecideds into the Remain camp. Nigel Farage the leader of the Leave campaign admitted as much when he noted that Leave lost a lot of momentum over the weekend.

The bookies meanwhile have shifted their odds squarely into the favor of Remain with implied probability now at 72% versus a low of 58% last week. Those wondering why the odds favor Remain to such a wide margin while the polls essentially show a deadlocked race, must understand that in the past referendums from Quebec to Scotland the polls overestimated the Leave sentiment by as much as 5%-8% therefore the bookies are confident that even money polling will result in a Remain win, especially when the 1.2M UK expats are taken into account most of whom would overwhelmingly vote for Remain given the EU benefits they enjoy.

The markets therefore have started to price in a Remain win with cable soaring to a high of 1.4674 in London morning dealing before finally succumbing to some profit taking. The sterling index is now up more than 2% on the day with cable set to challenge the recent swing highs at 1.4700.

With no data in North American trade the focus will remain squarely on UK as cable continues to be the center of attention. Tomorrow however the focus will shift to this side of the Atlantic as Ms. Yellen provides her semiannual testimony to Congress. For now however the market focus will remain on Brexit and the concomitant risk flows that accompany that story as equities will likely set the tone for the rest of the day.

Boris Schlossberg
Managing Director

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