In case of a Leave vote, there is no doubt about GBP weakening sharply. The stress will spread to EM space, EUR and other risk assets. On the flip side of the coin should be JPY, CHF and gold.
What really makes a difference from the CHF event, BoJ surprise move weakening the JPY by 3% or events related to ZAR move of 10%, is that the market was getting ready for quite some time. The option market has been pricing approx. 8-9% downside move in GBP for couple of weeks. Even with a relief rally on Monday, we are still not out of the woods yet. The GBPUSD vols remain at very high levels as the risk of Brexit is still present and we do not know what will follow.
When looking at possible outcomes we should split between countries with direct trade exposure to UK/EU and with big banking exposure to UK.
As mentioned above, the impact on GBP will be the highest, followed by EUR, CEE EM (CZK, PLN and HUF), other EM (MXN, ZAR, TRY…etc.). The commodity currencies (AUD, NZD or CAD) will be effected less, but may get hurt by a fall in commodity prices.
Event risk is not UK leaving EU but what damage it may bring to EU project as such. On the other hand EU should really do some reflection as migrant crisis, threat from Russia or internal inability at political level to make right decisions at the right time is alarming. Looking like EU is losing the steam at the moment and is not willing to make the necessary structural changes.
HUF and PLN may suffer but interesting development will be in EURCZK, as the immediate reaction may push the cross higher. In case of Remain vote, it may be the contrary but don’t forget about CNB protecting the 27.00 floor, thus limiting downside. But will it really do so, even when the flows will be really huge?
The second aspect to consider are capital flows to safe heavens. There are some currencies that may serve as a parking vehicle like JPY, CHF, SEK or DKK.
The third one may be the inter-connection of banking system of different countries not only to UK but to EU too. Example could be the CEE currencies that are higher beta but still do lots of trading and banking with EU/UK. They may be followed but TRY, ZAR, MXN and to certain extent BRL.
Financials crying?
Yes, they are what was visible by steep declines in their stocks recently. The EU insurers and pension funds piled into bonds as a part of risk management and last minute positioning before Brexit vote. Unwinding of these positions can be massive in case of No vote, what we witnessed on Monday as a part of relief trading. The banks are suffering from low margins due to low/negative rates what is putting additional pressure on the sector as such. Interesting opportunities in UK banks? Look at HSBC, Lloyds Banking Group and Barclays as they may benefit the most from Stay results not because of revenue but from regulatory visibility within EU legal framework.
A side note
Brexit – the UK vs EU debate is still on the table but the real issue that has caused all the mess is “local” politics in UK, where the Conservative or Labour Party haven’t sorted out how they should view and position themselves with respect to EU membership. But this lack of self-reflection is pretty expensive looking at economic uncertainty and the stress present in financial markets.
Recent polls showed that the “Remain” supporters are slowly coming back.
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