- Dealing with the extreme uncertainty of Brexit wasn’t the main concern of Citi’s FX officials last week, but the sudden advance of the Leave camp is a cause to panic
According to a Financial Times report, five of the Citigroup’s senior currencies executives holidayed for one to three days last weekend, ahead of what the BoE’s governor described as the “biggest domestic risk facing the economy”.
Employees in the world’s biggest currencies-dealing bank felt the situation was embarrassing. The Nikkei owned newspaper quoted them as saying “the timing and nature of the trip was insulting to employees.” One said: “The optics here are bad.”
So the big theme here is that a sense of responsibility could be missing among Citi’s FX executives. However, others may look at the situation from a different angle – the ‘big guns’ are calming their minds down in the few days leading up to black Wednesday, preparing for a Brexit restless night.
Significant Effects, All Getting Ready
The coming week in the markets will be all about the Brexit vote, as it could have significant economic and financial impact in a range of scenarios. And since Britain’s 43-year-long relationship with the EU is being put to the vote, central banks, brokers, banks, liquidity providers, traders and all other market participants around the globe are preparing financial backstops to mitigate market turmoil in case Britons vote to leave next week.
According to a research note from Danske Bank: “A Brexit would leave a high risk of sending the euro area into recession in H2 before recovering gradually again in 2017. But the key word would be the uncertainty that would hang over the markets and economies for a long time. The risk of new elections in other countries on leaving the EU would be elevated and increase the concern over the longer-term sustainability of the whole EU system.”
The sterling incurred steep losses earlier this week after recent polls showed a sudden advance for the Leave camp. Up until a couple of weeks ago, the pound was edging higher along with the Remain camp’s lead. The same action was seen for all major British stock indices which are all now back in the red year-to-date.
Obviously post-vote market sentiment will very much depend on whether Britain decides to stay or go.
In the days leading up to the June 23 poll, the Bank of England is consumed with preparing contingency plans for ensuring there is no repeat of the near-meltdown that occurred during the banking crisis of eight years ago.
Michael Saunders, the BoE’s MPC member, expects the pound to come under severe pressure and anticipates a 15 to 20 per cent depreciation of sterling against currencies of the country’s main trading partners.
However, other analysts say that the BoE may not respond quickly to Brexit, and at the earliest would change its monetary policy in August meeting once the politics and policy become clearer.
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The ECB, as well as other global central banks, announced on many occasions that it is gearing up for the UK leaving the European Union by activating swap lines to financial institutions should a Brexit trigger capital outflows in the short-term.
Impact on Financial Industry Jobs
It is widely expected in the finance industry that a Brexit would have a more painful impact on its staffers amid contagion fears and slowing growth. Estimations suggest the Brexit to cost the country some 100,000 financial services jobs, while many firms have already started making contingency plans for a possible decision by Britain to leave the EU on June 23.
Deutsche Bank and JP Morgan have already begun to examine whether to move parts of their London business and some British-based staff after a possible Brexit. Morgan Stanley is preparing plans to move 1000 workers from London. Most are expected to go to Frankfurt.
Britain’s largest bank, HSBC, warned earlier this year that it would move 1000 jobs to Paris in the event of a Brexit.
French banks with significant operations in London, such as BNP Paribas, Societe Generale and Credit Agricole, have already drafted contingency plans for a Brexit that would include moving staff back to Paris.
Meanwhile, RBS and Lloyds bank could dust off plans to move their headquarters from Edinburgh to the British capital if the EU referendum triggers a second vote on Scotland independence.
In the last few weeks, an increasing number of brokerages across various trading sectors increased margin rates to stop clients from making risky trades in the run-up to June’s referendum. With the memories of the SNB’s move still embedded in their minds, the step was taken in a bid to not go out of business if there are wild swings in the market following the result, and to protect their customers from any sharp shifts that could wipe out their account balances in an instant.
In January of last year, many banks and brokers booked millions of dollars of losses in a matter of minutes following the decision announced by the SNB to no longer peg its currency to the euro. Interactive Brokers, IG Group, London Capital Group and CMC Markets suffered steep losses while Alpari UK closed its doors and FXCM had to receive a $300 million rescue loan from Leucadia. Saxo Bank’s net loss from the Swiss franc black swan totalled $108 million.
The list of brokers demanding higher collateral from their customers for trading includes OANDA which has lowered the maximum leverage available on GBP pairs to 20:1 and on euro pairs to 50:1, starting from the market close on June 17, 2016.
Saxo bank hiked margin requirements on GBP pairs to 7 per cent. In addition, Finance Magnates reported earlier this week that Forex.com will put in place temporary changes to its margin rate requirements after the market closes this Friday. Minimum margin rates for all UK indices and GBP crosses including EUR/GBP will increase six-fold from 0.5 per cent to 3 per cent, and minimum margin rates for EUR crosses, EUR indices, and US indices will be doubled from 0.5 per cent to 1 per cent. CMC Markets and IG Group, among others, also announced similar changes earlier this week.