On Thursday 23rd June, the United Kingdom holds a referendum on the question of whether it should leave the European Union. Strange but true: the vote is not legally binding, and would simply advise the British Parliament to begin negotiating an exit with the E.U. which would probably take some years. Nevertheless, it is hard to imagine that a “Leave” instruction would not be followed.
A “Leave” vote would be a political earthquake, with major repercussions not just for British and European markets, but for global markets as well, at least over the short term.
A key arena that will see the implications of the vote play out will be the Forex market, where the GBP/USD currency pair (British Pound vs. U.S> Dollar) is one of the major global currency pairs.
Let’s take a look at the current state of play, what impact a vote either way is likely to have upon the British Pound, and over what kind of timeline it is likely to run. Finally, if you form an opinion on how the vote is going to go, I will talk about the best way you might exploit that.
Sunday’s Situation
The latest polls have shown a swing towards Remain, but overall the polls can be said to be more or less neck and neck: certainly too close to call.
Interestingly, betting markets are far more skewed. British betting site Betfair offers implied odds of a 73% chance of a vote to Remain, although just a few days ago this fell as low as 60%. The question is, why is there such a discrepancy between the odds and the polls? There are a few probable reasons:
Opinion polling is widely distrusted. This is partly because the pollsters generally were wildly wrong in their forecast of the British general election result last year, and partly because this vote is so unique that samples cannot be modelled with a very high degree of confidence.
Withdrawing from the European Union would be a big leap into the unknown, and could have major consequences for the British economy and political system. Generally, referenda such as these tend to favor the status quo. Therefore it is felt that at the last minute, wavering and uncommitted voters are more likely to go out and cast a vote for Remain than Leave.
Last Friday, a pro-Remain British legislator from the overwhelmingly pro-Remain opposition Labour Party was murdered in the street, allegedly by a man shouting “Britain First”, a slogan that would naturally be associated with the Leave campaign. The assassin had links with a far-Right political organization. It might be insensitive to point this out, but an event such as this seems likely to boost the Remain campaign, both from sympathy and fear.
The Dynamic
There is no doubt the British Pound and the stock market strengthen as the Remain vote is seen to strengthen, and conversely, weaken as the Leave vote strengthens.
As we have already seen, the markets are actually expecting a Remain vote. This implies that more of a Remain success has already been “priced in”, and therefore the bigger potential swing would be against the Pound and British stocks as a Leave victory became more apparent.
Here are the numbers that are being talked of by the experts: a Leave vote would see GBP/USD fall by up to 25% to a level between $1.30 and $1.10. Alternatively, a Remain victory could see the pair rise as high as $1.60.
Such a move in the event of a Leave victory could dwarf even last year’s CHF unpegging crash.
Timeline Countdown
The vote will be held on Thursday 23rd June. Until the polls open for voting, there will be periodic releases of opinion polls. These will move the market, but they will need to start showing decisive movements to make any very significant effect. Additionally, telephone polling is seen as more reliable than internet polling. So for example, a telephone poll showing one side has pulled into a ten point lead would be likely to move the market significantly, possibly by 1% or 2% within seconds. However, polls showing small fluctuations of only a point or two are unlikely to make much impact.
Starting at around midday British time on Thursday 23rd June, there will begin to be rumors about voter turnout. A higher turnout than expected will probably boost Leave, but it will vary area by area: generally, older, less educated, working class demographics tend to support Leave, so a stronger than expected turnout by these sectors can be expected to make a Leave victory more likely.
There will only be rumors with no solid facts until about 12:30am local time on Friday 24th June when the first results are expected to be declared. Results will not be released in a uniform fashion, but instead will run on for at least 4 hours and quite probably longer until a final total result becomes clear.
As each district releases its results, they will be analyzed for deviations from how the demographic profile of that area is expected to vote in the event of a 50-50 tie. This kind of analysis is always very problematic, but it will happen. For example, the first result is expected from Sunderland at 12:30am. Pollsters estimate that if Leave wins by more than 6% in Sunderland, they will be on course to win nationally. So as each result comes in, the market can be expected to fluctuate in a volatile way, especially if (as is likely) the individual results are very contradictory.
How to Trade the Brexit Vote
It is a bad idea to use Forex or any financial market, as a retail customer, to try to profit from the result of this vote. There are a number of reasons:
Retail brokers have increased their margin requirements on GBP and British instruments.
Volatility might be enormous: literally, the biggest market movements ever seen in modern times. This would be likely to mean a completely inaccessible, illiquid market for a period of time as the eventual result becomes clear and possibly at other times too.
With most retail brokers, it is possible to lose an amount greater than your deposit.
We can expect many retail brokers to shut down access to any GBP entries or exits at crucial periods of time.
For these reasons, if at any point you really want to bet on the outcome of the vote, it would make much more sense to make a bet with an online bookmaker such as Betfair. You can obtain a defined risk and a defined payout without worrying about the possibility of unlimited losses or wild volatility.
Forecast
I forecast a fairly narrow victory for Remain, although in any case I will not be taking any kind of direct position on the question. While there is a great deal of discontent with Britain’s membership of the E.U., there are probably too many people with too much to lose who are too frightened to vote Leave in order to deny Remain a victory.
Having said that, a surprise victory for Leave is not out of the question, and the odds that can be obtained (at the time of writing) could be considered attractive.