Thursday’s Brexit
vote result won’t officially be known until 2:00 am ET Friday. However,
traders will be closely watching currency markets for clues throughout
the day on Thursday as to whether or not the United Kingdom will leave
the European Union.
Foreign
exchange—or forex—is a marketplace where traders buy one currency while
simultaneously selling another. If you have US dollars and need euros,
you would sell your dollars while buying euros at the prevailing rate.
There’s no central exchange like there is for stocks, but prices in the
competing markets—mostly run by banks and forex dealers—closely track
each other.
According to the
latest data from the Bank for International Settlements (BIS), $5.3
trillion changes hands in forex markets each day. It takes the New York
Stock Exchange over a month to match that amount. Nevertheless, in times
of market turmoil, trading becomes more expensive because a lot of
large traders simply leave the market. In addition, much of the volume
is dominated by automated high frequency trading algorithms.
Expect volatility on the Brexit vote day
Traders
expect markets to be extremely volatile on Thursday and Friday
regardless of how the vote goes. As global markets are increasingly
interconnected and correlated, those huge swings will affect all asset
classes—stocks, bonds, derivatives and perhaps even real estate (according to one analyst).
George
Soros recently said that the pound would eventually lose 20% of its
value if there is a Brexit. That would wipe out $452 billion of wealth
locked up in US stocks alone, according to data compiled by Yahoo
Finance.
As it happens, the
largest forex trading hub in the world is London, which is right in the
thick of the action. Although the British pound sterling accounts for
only 12% of forex volume, 41% of all the actual trading is done in the
UK, according to data compiled by Yahoo Finance from the BIS.
Given
the importance of the vote, no official exit polls are being conducted
in the UK out of fears of being inaccurate. But with trillions of
dollars worth of bets on the line, many hedge funds will be conducting
their own private polls during the day, according to Keith Bliss of
Cuttone & Co. The results of those polls will be reflected in forex
prices, especially those denominated in the pound.
What to watch until the votes are counted
According
to Bliss, the most important market to watch is the GBD/USD pair, which
is the pound versus the dollar. It is currently trading at 1.468 (and
can be followed in real time here).
If traders believe there will be a Brexit, the price will go down; if
they believe the UK will remain in the EU, the price will go up.
The
key levels to watch initially are 1.4020 to the downside (4.5% below
the current price) and 1.4895 to the upside (1.5% above), according to
Bliss. “Of course, the market could trade above or below those levels.
However, I doubt it would go much below 1.25 or much above 1.55 on the
initial trading Thursday morning,” says Bliss. (That downside level of
1.25 is nearly 15% below the current price and it has not been touched
since 1985.)
Bliss points out
that people tend to vote with their pocketbooks, which makes a Brexit
less probable, but he adds, “Keep an eye on the sterling-dollar pair.
That will give you the best clue in the world on what’s happening with
the vote.”Marketswing
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