FX traders pick through Brexit wreckage
Britain's vote to exit the European Union fired volatility back into currency markets and gave traders opportunities in a number of currency pairs, including minors and exotic currencies as well as the majors.
A week since Britain voted to leave the European Union (EU) after 43 years of membership, it is still no clearer who will lead the UK government or how Britain will negotiate its exit from the EU. Markets are on tenterhooks for more details, but some traders have already profited from currency bets.
Paul Chappell, founder and chief investment officer at C-View, says it has been a while since currency markets have seen such sudden moves.
He says: "The 'up all night' short-term strategists who immediately responded were presumably able to short sterling at relatively good levels compared to where it fell to."
As of 12.30pm on Thursday, June 30, 2016. Source: FXPro
In the 12 hours preceding the closing of polls, GBP/USD fell 10% from 1.5020 to 1.3525, GBP/JPY fell 16% from 160.18 to 135.10 and EUR/USD fell 5% from 1.1425 to 1.0912.
Trading platform Oanda reported a 340% increase in average daily volume on Friday, June 24.
Chappell says: "We've been extremely busy. We wrote options to the 23rd and bought options to the 24th, so we benefited by writing options of high volatility before the vote and got the benefit of it after the vote.
"Strategies expecting an appreciation or depreciation of the pound got rewarded quite handsomely by using this approach and were reasonably successful."
Hedge fund manager James Hanbury at Odey Asset Management is said to have made £110 million betting against the pound in advance of the referendum, while his pro-Brexit boss Crispin Odey also played the odds right.
Currency analysts predict further weakness in sterling as the reality of political uncertainty undermines economic growth – Rabobank predicts GBP/USD to fall from its current level of 1.3460 to 1.23 by the end of the year.
However, Swedish bank SEB is significantly more bullish than Rabobank, predicting GBP/USD to fall to 1.28 by the end of the year. SEB's senior FX strategist Richard Falkenhall believes that the pound is long-term undervalued at present and has already done a fair share of its likely depreciation. Nevertheless, the pound is unlikely to rally given the current headwinds, he adds.
"Determining where a currency in free-fall will bottom is never easy," says Falkenhall. "Overshooting is more the rule than the exception in FX markets. Further, the UK's present uncertain and volatile political conditions and lack of leadership justify a weak currency for now."
The US dollar looks attractive, compared with other safe-haven currencies such as the Swiss franc and the yen, as well as the euro, says Janwillem Acket, chief economist at Swiss private bank Julius Baer.
He says: "With the British pound, the euro also came under pressure. We believe this will last against the US dollar."
Julius Baer has reduced its three-month EUR/USD forecast to 1.10 from 1.15 and 12-month prediction to 1.12 from 1.15.
"Brexit is putting Switzerland’s government under a squeeze too," says Acket. "The renegotiation of free mobility of EU citizens in Switzerland is set to find a deaf ear in Brussels and to miss domestic deadlines."
However, the dollar is dividing analysts. Advisory firm CrossBorder Capital has questioned why the dollar has not rallied even more – on its trade-weighted index the dollar rose by just 1.8% in the initial three days after the referendum result.
The firm says in its most recent research note: "This latest muted response of the US dollar sits uncomfortably alongside many pundits who continue to push the idea of a super-strong US currency."
It attributes this to either the dollar being seen as less of a safe haven than other options such as gold, or that global investors have already invested heavily in dollars over the past few years and need no more.
Exotics and minors
Major currencies aside, there were many exotics and minors that provided excellent trading opportunities pre- and post-Brexit. GBP/CAD found a stubborn resistance below 1.9300 before plunging more than 1,800 pips post-Brexit. This pair is firmly bearish and with investor attraction haunted towards the pound as post-Brexit uncertainty mounts, prices could trade back lower towards 1.7250, says Lukman Otunuga, research analyst at ForexTime.
“Now the Brexit has become a reality, sterling weakness could be the theme consequently making exotics a popular choice to trade," he says. "An example could be the GBP/SGD which is heavily bearish on the daily time-frame, with a breakdown below 1.800 encouraging sellers to attack prices towards 1.7850.”
ING bank also sees "a window opening for higher beta FX" and expects the Russian rouble, South African rand and Turkish lira to appreciate in coming days and weeks.