By Zachary Storella
“Safe-haven flows will turn to the Japanese yen, sovereign debt and gold.”
Today I am pleased to bring you an interview on “Brexit” – the British referendum on whether or not to leave the European Union – and how might this major economic event might play out. The referendum takes place on June 23rd and has already been affecting the global financial markets with investors trying to find safety for their investments or by employing strategic positions.
Helping us decipher this situation in the interview are two analysts from Admiral Markets, a global trading provider of trading on Forex and CFDs on stocks, indices, precious metals and energy.
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Nenad Kerkez is a full time trader and dedicated analyst who is well known on numerous websites for Forex trading as Tarantula.
Chris Svorcik has been a professional trader since 2011. He has completed degrees in finance, economics & politics, and devoted all of his spare time into learning all important aspects of trading.
Can you give us a little background on the what Brexit is and why it matters?
Nenad: Similar to “Grexit” Brexit is a word play for “British exit”. It makes possible for Britain to exit European Union after the referendum that will be held on June 23. It is a huge event for both European Union and Europe. The Britons have been divided between in-and-out camp with many people still undecided.
The future of European Union is at stake and Brexit might encourage other EU members for a similar action. It might cause political jitters in EU while UK might suffer initial damage to its economy as the GBP will initially tank pulling the country back into recession. Actually you are able to read our article on Brexit at our website.
Chris: The British vote to stay in the European Union or leave the E.U. is a crucial and historical decision for the future of the United Kingdom, Europe and even the world. In my view the choice whether to stay or leave the E.U. is ultimately a long-term strategic decision. The U.K. voters will need to decide whether they accept an independent but smaller role in European and global affairs, or whether they prefer influencing a bigger and more powerful E.U. entity from within. Both the U.K. and the E.U. cannot avoid cooperation with each other due to their geographical proximity but a Brexit could spark more isolationism, more E.U. exits, E.U. instability or even E.U. collapse. In contrast, the U.K. would gain more independence on migration, laws, and finance like the Pound. Accessing the E.U. markets, however, still remains a top priority for the Brits, who might not encounter easy negotiations with the E.U., the organization they just left.
As you see it, if Britain leaves the EU, would that be a positive or negative for Britain economically?
Nenad: Short term it will be negative. GBP will tank, UK might lose the status of a financial hub. Major banks might relocate, bonds and shares will be initially dumped.
Longer term it might be positive for UK, especially because in the case of Brexit they don’t need to dump GBP and re write legislation at same time while keeping their own policy without interference from Brussels. If the UK decides to stay in EU, it must adopt the EUR and drop the GBP by 2020.
Legislation in the UK will also need to be aligned with the European Union codes / legislation – this means a major rewrite.
On the flip side, if Brexit happens the UK will keep the GBP and legislation but will run the risk of losing its citizens with EU passports
Chris: The OECD has released statistics which show that the economic performance in the short and mid-term is negatively affected. The long-term impact remains unknown and depends on a potential deal between the U.K. and the E.U. after the Brexit. Great Britain could choose to be fully independent, which means that the E.U. will add tariffs to British goods and services hurting GDP. They could opt to be part of the European Economic Area but this would still entail contributions to the E.U. and meeting E.U. regulations for free trade, which would undermine one of the (main) arguments for leaving (escaping E.U. bureaucracy). Or the U.K. and E.U. could agree to a bilateral trade agreement but the negotiations might be tougher than expected.
If the Brexit does take place, what markets (stocks,currencies,bonds,etc) do you feel will be the most affected within the EU or Britain? Is there any safe places for investors or traders?
Nenad: In the event that there is a Brexit, both GBP and EUR will be effected, more so the GBP, as the effects of a Brexit on the economy of UK will be a bit of an unknown.
The EUR to a lesser extent, because the question of whether other EU members may follow with an exit, being the start to the end of the EU.
The FTSE will likely be effected most, and well, other Equities may be effected too due to their positive correlation.
The safest place for investors would be Sovereign Bonds, they seem to stand the test of time when its risk-off sentiment. Also, look to possible safety with the JPY, which seems to be reserve currency and strengthens during risk-off.
Do you feel this type of event will have the ability to have a major affect other global markets? Do you feel this will have an effect on general investor sentiment?
Nenad: As the UK is one of the G7 nations, an economic slow down to one of these trading nations is likely to result in weaker international trade in the immediate future. As stated earlier, Equities are largely positive correlated, so Global Indices will most likely drop in the initial phase of the Brexit until it is better known what the impact will be on global trade.
Chris: Yes absolutely. A remain vote will not “rock the boat” and keep the status quo. This could be positive for the Euro and British Pound as a potential political upheaval is off the table. A Brexit, however, could lead to an unstable environment and the market uncertainty typically favours the U.S. Dollar, the Japanese Yen and Gold.
There has been some speculation that if Britain does leave the EU it could open the door for more countries to also consider leaving. Do you feel that is a likely scenario? And if so, what other countries could be candidates to exit as well?
Chris: If British voters choose for a Brexit, then there is a significant chance of other countries following the British example and eventually exiting the E.U as well. This might not happen immediately but the potential ‘domino effect’ could destabilize and even derail the European Union…
When a Brexit would take place then Germany and France are faced with a tough decision how to respond. They might opt to increase the integration of the European Union in an attempt to compensate for the British loss. The deepening of the E.U. integration could however further aggravate and annoy E.U. skeptics. In such a scenario, central European members, the Netherlands, Greece, and others might hold similar exit referendums that could threaten the existence of the current form of the European Union.
The forex industry had a gigantic black swan event in January 2015 when the Swiss National Bank abandoned its peg against the Euro without notice. This put many forex brokers out of business and did lasting damage to other large brokers that were able to stay in business.
Do you feel that brokers in the forex industry are ready and prepared for this major event of a possible Brexit?
Nenad: Yes definitely. I think that big majority of brokers are prepared for Brexit event. I’d personally suggest an increase on all GBP crosses, EUR crosses, and Indices. Movements will be big and there might be some liquidity and pricing gaps.
Will this event and its aftermath create change in the forex industry?
Nenad: I don’t think so. Brokers should be well prepared and currency crosses will resume its normal movement after initial shake outs caused by Brexit. UK exit will cause panic amongst investors worldwide, hammering equities and weakening the British pound.
Safe-haven flows will turn to the Japanese yen, sovereign debt and gold.
Equities will drop heavily, so traders should carefully watch Nikkei, Dax and SP500. When there is a risk-off environment, the JPY appreciates because foreign flows from Japan are repatriated back to their local currency.
After all we will be able to trade Forex the normal way when market settles up. Don’t forget that market always needs to be in equilibrium, no matter what that’s why we have central banks and algos.
With all things considered and many opinion polls showing contradictory results, do you feel that Britain will vote to leave the EU on June 23rd?
Chris: The results will most likely be very close indeed… But at the end of the day, I do not expect Great Britain to leave the E.U. I think that the stay camp will win by a slim margin.
What reasons make you feel this way and what do you think the lasting impact will be?
Chris: The key group is the undecided voter. Around 10% of the voter has not made up their mind and their choice could swing the result to both sides. I believe that it will be easier for undecided voters to vote for continuation with the E.U. than it is to leave, because generally speaking change is often more difficult for humans.
However, the lead of the “stay” camp has melted away for the first time since the average was calculated in September 2015. The UK public is broadly divided down the middle, when we look at those who already have a strong feeling on the issue.
Even if the stay camp wins, the lasting impact could be the feeling of a narrow ‘escape’. The closeness of the poll results show, once again, more E.U. fatigue and this could weigh in on the future negotiations and plans between member states how to organize, structure and direct the E.U in the future. The U.K. could take the lead in this debate how to shape the future of the E.U., if it, of course, chooses not to exit.
Is there anything else that is important that we failed to talk about?
Nenad: We have covered most of general stuff. Surely it will be an important event that will shape or reshape both UK and EU.
Chris: I think that a wide range of topics have been covered. Obviously tension on the voting day will be extremely high. Minor factors could impact the referendum results in unexpected ways and the outcome will remain close I believe till the end. It is quite a fascinating idea that the decision to stay or leave could depend on a couple of votes difference…
And in case we miss anything in this discussion, please feel free to ask us questions directly via twitter using this hashtag: #AMBrexitFAQ
You can also visit our live webinar about Brexit, for further explanation around the event.
Thank you to both of the analysts for taking the time to answer my questions in our latest forex interview. You can follow more of their analysis on Brexit with the links above.