Have Brexit Risks Increased?

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Market Drivers Mar. 21, 2016

Cable lower on Ian Duncan Smith resignation
Comm dollars swing up and down
Nikkei closed Dax -0.09
Oil $40/bbl
Gold $1243/oz.

Europe and Asia:
EUR Current Account 25.4 vs. 26.3

North America:
USD Existing Home Sales

After several weeks of high turbulence the currency market was much more sedate at the opening of this week’s trade with little event risk on the calendar to move prices.

The biggest newsflow over the weekend was the resignation of Ian Duncan Smith the Secretary of State for Work and Pensions in the Cameron administration over ostensibly the proposed cuts to the budget for disability benefits. However, Mr. Smith is one of the key proponents of the Leave campaign and the move was seen by the market as challenge to Mr. Cameron’s authori

Prime Minister Cameron is trying to maintain the momentum for the Stay vote in UK referendum on leaving the European Union and the resignation by Mr. Smith suggests that the former Secretary may challenge Mr. Cameron for the leadership of the Tory party.

The latest poll of polls by National Centre for Social Research shows that Brexit vote is essentially even money with the general public slit at nearly 50% on the issue. Therefore any newsflow that could tip the odds either way is likely to create volatility in cable. The pound opened weak and fell through the 1.4400 figure as traders reacted to the weekend news, but for now has found support underneath that level as currency traders remain in a wait and see mode.

Despite the much closer than expected polling, the markets are essentially complacent about the outcome of the June 23rd vote, believing that in the end the Stay faction will prevail. But if polls begin to move towards the Leave camp cable will come under fresh selling pressure.

Some analysts have noted a wide disparity between the online polls and the polls conducted by the more traditional media. The online polls have shown a much higher preference for the Leave vote. Part of the difference may simply due to the self selection bias of the online polls, but the divergence may also signal that the Leave vote may be stronger than the market thinks and that voters will only express their true feelings in an anonymous forum online for fear of being stigmatized in their place of business.

In any case the Brexit issue remains the central theme dominating cable trade and the volatility in the pair could increased as we move closer to the Referendum date.

In North America today, the calendar is quiet with only Existing Homes on tap. The markets will continue to digest the central bank news over the past two weeks, but given the lack event risk on the calendar consolidation may be the order of the day.

Boris Schlossberg
Managing Director

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