UK Voters Take Country Back- Now what?

It’s not official, but statistically called by all major pundits, U.K has voted to change the course of their own country and leave the European Union (52% Leave, 48% Remain). Their decision has sent the pound into free-fall (£1.3400), back to its 1985 levels outright and is battering global equity markets (Asia is down-3%).

Investors will wake up to a new global crisis which will surely prevent the Fed from raising interest rates as planned this year, and might even provoke a new round of emergency policy easing from Tier I and II central banks (Fed fund futures are now pricing in a rate cut).

Before the Euro markets open, risk aversion is dominating proceedings as investors flee to the safety of sovereign debt and gold.

Most households will wake up a tad poorer this morning as billions have already been wiped off equity markets – FTSE futures have fallen -8%, S&P 500 futures down – 6% and Japan’s Nikkei -8.5%.

The British pound has collapsed -10% (£1.3386), its biggest fall in 31-years (Once other markets begin to open, sterling could see another -5% decline). The EUR is down -3.4% to $1.0997 as investors fear for the future.

High beta currencies and commodities are also tracking the plunge. The Aussie and Kiwi are down nearly -4% to A$0.7354 and N$0.6995 respectively.

Today’s Brexit vote sees the yen back to its 2013 levels – Abenomics has been wiped out in less than six-months. USD/JPY has plummeted nearly seven big figures to ¥100.00.

Historically, yen is a strong currency of choice during times of stress. For the moment, Japan’s currency chief Asakawa has managed to put a floor under the currency with mention of possibility of intervention, via the use of swap lines with six other central banks. Finance Minister Aso has also spoken, promising “vigilance against excessive Yen strength.”

Investors have stampeded towards sovereign bonds, with U.S. 10-year Treasury yields falling -24 basis points to +1.53%, their steepest one-day drop in seven years. German 10-year bunds once again trade in negative territory, opening at -0.17%. U.K yields on the other hand have rallied; 10-year Gilts have backed up +20 basis points to +1.57% – meaning higher borrowing costs for PM Cameron’s government.

Commodities are mostly lower as a Brexit would be seen as a major threat to global growth. WTI is down -5.5% to $47.35 a barrel, while Brent has fallen -6% to $47.83. Gold has been taken of the leash, rallying $63 to +$1,326.50.

As the Euro markets open, the biggest concern will be the implications for the E.U of tonight’s U.K.’s seismic vote to leave the bloc. Dealers, investors and speculators will increasingly focus on the weakest links in the E.U – Portugal, Italy, Greece, and Spain. These nations are expected to come under immense pressure, as they are the chosen ones to suffer the most from a hypothetical breakup.

Expect central banks to be vigilant, loud and proactive to install calm.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell