Brexit and Traders - Where Are We Now
- UFX managing director, Dennis de Jong, talks about the EU with and without a Brexit
In recent weeks, we have felt a change in climate when examining the EU. This feeling has not stemmed from what some might consider a weak link in the EU's chain, but from one of the stronger players in the European Union.
While Britain toys with the notion of leaving the EU, we should take a step back and see how a positive or negative decision might affect the European and global trading markets.
70/30 . . . The prevailing opinion across the EU is that the odds of Britain staying in the EU are 70/30.
The weeks ahead, leading up to the referendum, will be very interesting, with the result being nothing less than historic. Historic, meaning some might consider the referendum as possibly being the beginning of the end for the EU, whilst others view it as a possible end of the beginning.
‘No’ voters would most likely rejoice over a negative outcome, and celebrate the beginning of the deconstruction the European project in its current form.
The Brits, being the referendum’s primary early adopters, have lost faith in the common European goal, and are making a very strong statement. Mind you, the referendum is not only closely watched in the UK, but all over the world, especially in other EU countries where anti-EU sentiment has gained popularity in recent years.
Interestingly the swings in the markets have failed to show any significant correlation with the movements of the GBP.
On the other hand, if the historically EU-skeptical Britain votes to remain in the EU, it could be interpreted by many as a vote of confidence - confidence in the European project, albeit needing adjustments to modernise its current status. Adjustments deemed necessary by many.
So how will it turn out?
That's the big question on a lot of traders' and investors' minds, and it is definitely going to make the next few weeks very interesting. To be honest, it’s too early to make an informed call.
Polls, cleared of undecided voters, seem to be hovering around 52% for pro-EU. In an effort to gain a bit more clarity, and being an economics aficionado, what we have looked at, and what might be an equally good indicator of sentiment, are the odds being offered by professional speculators across the EU. Surprisingly, various sites are quoting in the 65% to 72% range for Britain to stay in the EU.
Cross border trading
Before we take a look at how any decision might affect the British economy and the value of the GBP, we first need to analyse the implications of cross-border trading. In 2014, the UK exported 44.6% of its goods and services to the continental EU. Additionally, 53.2% of its imported goods and services came from the continental EU, despite the deficit for trading goods and the surplus for exporting services.
The European project needs a stronger British participant
Admittedly, whilst the Referendum concerns exiting the political union and being granted an assimilated economic status similar to that of Iceland, Liechtenstein, Norway, and the single-market member, Switzerland, any form of Brexit Brexit Brexit stands for British Exit, or in reference to the United Kingdom’s decision to formally leave the European Union (EU) as declared in a June 23, 2016 referendum. In a more immediate sense, a tight vote and unexpected result helped drive British pound (GBP) to lows that had not been seen in decades. The day following the referendum, former Prime Minister David Cameron resigned from office where he was replaced by Theresa May, who later resigned from office on June 7th, 2019. Active Prime Minister Boris Johnson was elected Prime Minister the following month, who was well-known as a headstrong Brexit supporter. While the United Kingdom was predicted to leave exit the EU by October 31st, 2019, the U.K. Parliament sought out a deadline extension that delayed voting on the new deal. Following Boris Johnson’s reelection, Brexit occurred on January 31st, 2020 at 11 pm Greenwich Mean Time. Brexit Creating Ongoing Issues in with Europe While the United Kingdom is in a transition period following its departure from the EU, the U.K. is negotiating its complete trade relationship with the EU, which is the United Kingdom’s largest trade partner. Terms of this trade agreement must be met by January 1st, 2021. Should terms of this trade agreement take longer than the projected resolution date of January 1st, 2021 then the U.K. must acquire an extension no later than June 1st, 2020. Failure to do so will result in the U.K. is subject to tariff and host rule changes exercised by the E.U. This situation is referred to as the “no-deal” Brexit and should this occur the consequences could result in a significant fallout of the U.K. economy. For the past few years, many banks and lenders operating previously in the UK had been given passporting rights to the European continent. The lingering uncertainty caused by Brexit resulted in many of these lenders relocating their European headquarters within continental Europe. Brexit stands for British Exit, or in reference to the United Kingdom’s decision to formally leave the European Union (EU) as declared in a June 23, 2016 referendum. In a more immediate sense, a tight vote and unexpected result helped drive British pound (GBP) to lows that had not been seen in decades. The day following the referendum, former Prime Minister David Cameron resigned from office where he was replaced by Theresa May, who later resigned from office on June 7th, 2019. Active Prime Minister Boris Johnson was elected Prime Minister the following month, who was well-known as a headstrong Brexit supporter. While the United Kingdom was predicted to leave exit the EU by October 31st, 2019, the U.K. Parliament sought out a deadline extension that delayed voting on the new deal. Following Boris Johnson’s reelection, Brexit occurred on January 31st, 2020 at 11 pm Greenwich Mean Time. Brexit Creating Ongoing Issues in with Europe While the United Kingdom is in a transition period following its departure from the EU, the U.K. is negotiating its complete trade relationship with the EU, which is the United Kingdom’s largest trade partner. Terms of this trade agreement must be met by January 1st, 2021. Should terms of this trade agreement take longer than the projected resolution date of January 1st, 2021 then the U.K. must acquire an extension no later than June 1st, 2020. Failure to do so will result in the U.K. is subject to tariff and host rule changes exercised by the E.U. This situation is referred to as the “no-deal” Brexit and should this occur the consequences could result in a significant fallout of the U.K. economy. For the past few years, many banks and lenders operating previously in the UK had been given passporting rights to the European continent. The lingering uncertainty caused by Brexit resulted in many of these lenders relocating their European headquarters within continental Europe. Read this Term promises to be complicated. The implications of a Brexit will most likely result in long-standing consequences across the greater EU, due to the country's strong inter-related economic and trade ties with the union.
Should the pro-EU voters win, the majority of us would most likely agree that the inevitable consequences of Britain’s economy and currency would be minimal. A pro-EU vote will be seen as a vote of confidence and serve as a trigger for structural reforms – reforms so many people in the EU long for desperately.
Brexit on the charts
Interestingly, the swings in the markets have failed to show any significant correlation with the movements of the GBP. However, it's also unclear whether the movements are being led by sentiment surrounding the odds of a Brexit, or the GBP itself. Sure, Volatility Volatility In finance, volatility refers to the amount of change in the rate of a financial instrument, such as commodities, currencies, stocks, over a given time period. Essentially, volatility describes the nature of an instrument’s fluctuation; a highly volatile security equates to large fluctuations in price, and a low volatile security equates to timid fluctuations in price. Volatility is an important statistical indicator used by financial traders to assist them in developing trading systems. Traders can be successful in both low and high volatile environments, but the strategies employed are often different depending upon volatility. Why Too Much Volatility is a ProblemIn the FX space, lower volatile currency pairs offer less surprises, and are suited to position traders.High volatile pairs are attractive for many day traders, due to quick and strong movements, offering the potential for higher profits, although the risk associated with such volatile pairs are many. Overall, a look at previous volatility tells us how likely price will fluctuate in the future, although it has nothing to do with direction.All a trader can gather from this is the understanding that the probability of a volatile pair to increase or decrease an X amount in a Y period of time, is more than the probability of a non-volatile pair. Another important factor is, volatility can and does change over time, and there can be periods when even highly volatile instruments show signs of flatness, with price not really making headway in either direction. Too little volatility is just as problematic for markets as too much, we uncertainty in excess can create panic and problems of liquidity. This was evident during Black Swan events or other crisis that have historically roiled currency and equity markets. In finance, volatility refers to the amount of change in the rate of a financial instrument, such as commodities, currencies, stocks, over a given time period. Essentially, volatility describes the nature of an instrument’s fluctuation; a highly volatile security equates to large fluctuations in price, and a low volatile security equates to timid fluctuations in price. Volatility is an important statistical indicator used by financial traders to assist them in developing trading systems. Traders can be successful in both low and high volatile environments, but the strategies employed are often different depending upon volatility. Why Too Much Volatility is a ProblemIn the FX space, lower volatile currency pairs offer less surprises, and are suited to position traders.High volatile pairs are attractive for many day traders, due to quick and strong movements, offering the potential for higher profits, although the risk associated with such volatile pairs are many. Overall, a look at previous volatility tells us how likely price will fluctuate in the future, although it has nothing to do with direction.All a trader can gather from this is the understanding that the probability of a volatile pair to increase or decrease an X amount in a Y period of time, is more than the probability of a non-volatile pair. Another important factor is, volatility can and does change over time, and there can be periods when even highly volatile instruments show signs of flatness, with price not really making headway in either direction. Too little volatility is just as problematic for markets as too much, we uncertainty in excess can create panic and problems of liquidity. This was evident during Black Swan events or other crisis that have historically roiled currency and equity markets. Read this Term spikes in the GBP might be visible around the time of the vote, but in the short-run, it seems a Brexit might be a non-event for the currency. And of course, the economy is already on a solid track.
In the long-run, and in case of a negative Referendum, we are considering the real implications to be more political, primarily due to the UK not sitting on the sidelines of the EU when the big blinds are played in the global economic game. Admittedly, as the fifth largest single economy, according to nominal GDP figures, the UK has fared reasonably well over the past few years, successfully sending its trade delegations from China to Brazil and many other emerging economies.
However, influencing an EU envoy and holding side discussions for its own economic benefit to the extent the UK currently enjoys, will not, officially, be possible following a Brexit. One might assume this will lead Britain to pursue its own global economic interests.
So, to wrap it up, a close call could be interpreted by the British government as a mandate to initiate structural reforms at the EU-level from which, we believe the EU, as well as Britain could benefit. After all, Britain has been at the forefront of political, judicial, and institutional development and one of Europe’s leading nations for centuries. Therefore, the European project needs a stronger British participant rather than a weaker one.
The bigger question, at the end of the day is if the US has any pro-EU influence on the polls.
Dennis the Jong is a Managing Director at UFX, offering <MassIsights trading technology
In recent weeks, we have felt a change in climate when examining the EU. This feeling has not stemmed from what some might consider a weak link in the EU's chain, but from one of the stronger players in the European Union.
While Britain toys with the notion of leaving the EU, we should take a step back and see how a positive or negative decision might affect the European and global trading markets.
70/30 . . . The prevailing opinion across the EU is that the odds of Britain staying in the EU are 70/30.
The weeks ahead, leading up to the referendum, will be very interesting, with the result being nothing less than historic. Historic, meaning some might consider the referendum as possibly being the beginning of the end for the EU, whilst others view it as a possible end of the beginning.
‘No’ voters would most likely rejoice over a negative outcome, and celebrate the beginning of the deconstruction the European project in its current form.
The Brits, being the referendum’s primary early adopters, have lost faith in the common European goal, and are making a very strong statement. Mind you, the referendum is not only closely watched in the UK, but all over the world, especially in other EU countries where anti-EU sentiment has gained popularity in recent years.
Interestingly the swings in the markets have failed to show any significant correlation with the movements of the GBP.
On the other hand, if the historically EU-skeptical Britain votes to remain in the EU, it could be interpreted by many as a vote of confidence - confidence in the European project, albeit needing adjustments to modernise its current status. Adjustments deemed necessary by many.
So how will it turn out?
That's the big question on a lot of traders' and investors' minds, and it is definitely going to make the next few weeks very interesting. To be honest, it’s too early to make an informed call.
Polls, cleared of undecided voters, seem to be hovering around 52% for pro-EU. In an effort to gain a bit more clarity, and being an economics aficionado, what we have looked at, and what might be an equally good indicator of sentiment, are the odds being offered by professional speculators across the EU. Surprisingly, various sites are quoting in the 65% to 72% range for Britain to stay in the EU.
Cross border trading
Before we take a look at how any decision might affect the British economy and the value of the GBP, we first need to analyse the implications of cross-border trading. In 2014, the UK exported 44.6% of its goods and services to the continental EU. Additionally, 53.2% of its imported goods and services came from the continental EU, despite the deficit for trading goods and the surplus for exporting services.
The European project needs a stronger British participant
Admittedly, whilst the Referendum concerns exiting the political union and being granted an assimilated economic status similar to that of Iceland, Liechtenstein, Norway, and the single-market member, Switzerland, any form of Brexit Brexit Brexit stands for British Exit, or in reference to the United Kingdom’s decision to formally leave the European Union (EU) as declared in a June 23, 2016 referendum. In a more immediate sense, a tight vote and unexpected result helped drive British pound (GBP) to lows that had not been seen in decades. The day following the referendum, former Prime Minister David Cameron resigned from office where he was replaced by Theresa May, who later resigned from office on June 7th, 2019. Active Prime Minister Boris Johnson was elected Prime Minister the following month, who was well-known as a headstrong Brexit supporter. While the United Kingdom was predicted to leave exit the EU by October 31st, 2019, the U.K. Parliament sought out a deadline extension that delayed voting on the new deal. Following Boris Johnson’s reelection, Brexit occurred on January 31st, 2020 at 11 pm Greenwich Mean Time. Brexit Creating Ongoing Issues in with Europe While the United Kingdom is in a transition period following its departure from the EU, the U.K. is negotiating its complete trade relationship with the EU, which is the United Kingdom’s largest trade partner. Terms of this trade agreement must be met by January 1st, 2021. Should terms of this trade agreement take longer than the projected resolution date of January 1st, 2021 then the U.K. must acquire an extension no later than June 1st, 2020. Failure to do so will result in the U.K. is subject to tariff and host rule changes exercised by the E.U. This situation is referred to as the “no-deal” Brexit and should this occur the consequences could result in a significant fallout of the U.K. economy. For the past few years, many banks and lenders operating previously in the UK had been given passporting rights to the European continent. The lingering uncertainty caused by Brexit resulted in many of these lenders relocating their European headquarters within continental Europe. Brexit stands for British Exit, or in reference to the United Kingdom’s decision to formally leave the European Union (EU) as declared in a June 23, 2016 referendum. In a more immediate sense, a tight vote and unexpected result helped drive British pound (GBP) to lows that had not been seen in decades. The day following the referendum, former Prime Minister David Cameron resigned from office where he was replaced by Theresa May, who later resigned from office on June 7th, 2019. Active Prime Minister Boris Johnson was elected Prime Minister the following month, who was well-known as a headstrong Brexit supporter. While the United Kingdom was predicted to leave exit the EU by October 31st, 2019, the U.K. Parliament sought out a deadline extension that delayed voting on the new deal. Following Boris Johnson’s reelection, Brexit occurred on January 31st, 2020 at 11 pm Greenwich Mean Time. Brexit Creating Ongoing Issues in with Europe While the United Kingdom is in a transition period following its departure from the EU, the U.K. is negotiating its complete trade relationship with the EU, which is the United Kingdom’s largest trade partner. Terms of this trade agreement must be met by January 1st, 2021. Should terms of this trade agreement take longer than the projected resolution date of January 1st, 2021 then the U.K. must acquire an extension no later than June 1st, 2020. Failure to do so will result in the U.K. is subject to tariff and host rule changes exercised by the E.U. This situation is referred to as the “no-deal” Brexit and should this occur the consequences could result in a significant fallout of the U.K. economy. For the past few years, many banks and lenders operating previously in the UK had been given passporting rights to the European continent. The lingering uncertainty caused by Brexit resulted in many of these lenders relocating their European headquarters within continental Europe. Read this Term promises to be complicated. The implications of a Brexit will most likely result in long-standing consequences across the greater EU, due to the country's strong inter-related economic and trade ties with the union.
Should the pro-EU voters win, the majority of us would most likely agree that the inevitable consequences of Britain’s economy and currency would be minimal. A pro-EU vote will be seen as a vote of confidence and serve as a trigger for structural reforms – reforms so many people in the EU long for desperately.
Brexit on the charts
Interestingly, the swings in the markets have failed to show any significant correlation with the movements of the GBP. However, it's also unclear whether the movements are being led by sentiment surrounding the odds of a Brexit, or the GBP itself. Sure, Volatility Volatility In finance, volatility refers to the amount of change in the rate of a financial instrument, such as commodities, currencies, stocks, over a given time period. Essentially, volatility describes the nature of an instrument’s fluctuation; a highly volatile security equates to large fluctuations in price, and a low volatile security equates to timid fluctuations in price. Volatility is an important statistical indicator used by financial traders to assist them in developing trading systems. Traders can be successful in both low and high volatile environments, but the strategies employed are often different depending upon volatility. Why Too Much Volatility is a ProblemIn the FX space, lower volatile currency pairs offer less surprises, and are suited to position traders.High volatile pairs are attractive for many day traders, due to quick and strong movements, offering the potential for higher profits, although the risk associated with such volatile pairs are many. Overall, a look at previous volatility tells us how likely price will fluctuate in the future, although it has nothing to do with direction.All a trader can gather from this is the understanding that the probability of a volatile pair to increase or decrease an X amount in a Y period of time, is more than the probability of a non-volatile pair. Another important factor is, volatility can and does change over time, and there can be periods when even highly volatile instruments show signs of flatness, with price not really making headway in either direction. Too little volatility is just as problematic for markets as too much, we uncertainty in excess can create panic and problems of liquidity. This was evident during Black Swan events or other crisis that have historically roiled currency and equity markets. In finance, volatility refers to the amount of change in the rate of a financial instrument, such as commodities, currencies, stocks, over a given time period. Essentially, volatility describes the nature of an instrument’s fluctuation; a highly volatile security equates to large fluctuations in price, and a low volatile security equates to timid fluctuations in price. Volatility is an important statistical indicator used by financial traders to assist them in developing trading systems. Traders can be successful in both low and high volatile environments, but the strategies employed are often different depending upon volatility. Why Too Much Volatility is a ProblemIn the FX space, lower volatile currency pairs offer less surprises, and are suited to position traders.High volatile pairs are attractive for many day traders, due to quick and strong movements, offering the potential for higher profits, although the risk associated with such volatile pairs are many. Overall, a look at previous volatility tells us how likely price will fluctuate in the future, although it has nothing to do with direction.All a trader can gather from this is the understanding that the probability of a volatile pair to increase or decrease an X amount in a Y period of time, is more than the probability of a non-volatile pair. Another important factor is, volatility can and does change over time, and there can be periods when even highly volatile instruments show signs of flatness, with price not really making headway in either direction. Too little volatility is just as problematic for markets as too much, we uncertainty in excess can create panic and problems of liquidity. This was evident during Black Swan events or other crisis that have historically roiled currency and equity markets. Read this Term spikes in the GBP might be visible around the time of the vote, but in the short-run, it seems a Brexit might be a non-event for the currency. And of course, the economy is already on a solid track.
In the long-run, and in case of a negative Referendum, we are considering the real implications to be more political, primarily due to the UK not sitting on the sidelines of the EU when the big blinds are played in the global economic game. Admittedly, as the fifth largest single economy, according to nominal GDP figures, the UK has fared reasonably well over the past few years, successfully sending its trade delegations from China to Brazil and many other emerging economies.
However, influencing an EU envoy and holding side discussions for its own economic benefit to the extent the UK currently enjoys, will not, officially, be possible following a Brexit. One might assume this will lead Britain to pursue its own global economic interests.
So, to wrap it up, a close call could be interpreted by the British government as a mandate to initiate structural reforms at the EU-level from which, we believe the EU, as well as Britain could benefit. After all, Britain has been at the forefront of political, judicial, and institutional development and one of Europe’s leading nations for centuries. Therefore, the European project needs a stronger British participant rather than a weaker one.
The bigger question, at the end of the day is if the US has any pro-EU influence on the polls.
Dennis the Jong is a Managing Director at UFX, offering <MassIsights trading technology