Brexit trade: a look beyond sterling and get back to basics

So, on the eve of the EU referendum, it's really time to get serious about what you are going to trade.

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The obvious place to start looking is the pound and FX. That is a no brainer. The Yen (safe haven status), TRY (the carry trade on risk-on, bullish on Bremain vote especially due to breaking news of EU/Turkey talks to start next week), EUR (Bremain is bullish for EZ), DXY( bearish on a Bremain) etc. Stocks and debt, hmmm?, Yeah, but...

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FX and all these other asset classes depend on the outcome of the vote and how close the result is. For instance, the pound will fall on a Brexit. However, be careful. FX will be volatile in thin markets due to a lack of committed traders and increased initial margin requirements with stops positioned all over the place, positioned by specs taking a gamble on a minefield.

(Don't expect to get your fill by the way nor expect to be treated very well by your broker if you call in to complain, because they sure will not be treated very well by the desk when raising your query of the fill with the trader).

On a Bremain result? 

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Well, look where sterling is today; Lovely levels for a Brexit, but not so great on a Bremain. However, that is not to say that sterling could not rally from here as one would expect some very large spikes running up to the event for profit taking and scalping opportunities. But, that is all a big gamble and you can lose more than you initially staked just as easily as you might win a big figure here or there all within the same hourly charts. So, 1.50, 1.52, 1.54 max on Bremain polls and a Bremain result? Who knows? I personally don't see it breaking Oct 2015 highs 1.5507, but then again, should attention turn to the Fed on hold for 2016 right away ... anything is possible. After all, I'm still surprised that the dollar has held up so well in recent weeks (May rally) although there is an element of the safe-haven status at play that is to blame, and of course the currency wars being played by Central bankers under the table.

Calculating other asset classes and FX

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Ok, stocks. Well, stocks have also been volatile this month due to the polls coming in more or less in line. However, we have seen a big decline at times when the Brexit vote looked a likely possibility. But, again, volatility is is a certainty, so good luck with that as well. I guess a Bremain vote would be bullish euro and European stocks. So, where does that leave the dollar on a Bremain? Will the risk-on see a massive unwinding of dollar longs? Probably. And that brings me to a trade that could be a sure bet either way the vote goes.

Gold. The yellow metal usually does well on a weak dollar and as a safe haven or a hedge against inflation (and these days against deflation as well). All of those three to me get a tick no matter which way Britain decides to go at the EU crossroads this week. However, this whole Brexit event has been a massive distraction to the biggest story in the markets. And even if Britain does vote to leave, it is not legally binding anyway, (Brexit: cash in on the dead end at least?), and in which case, let's just say it was a bit of meanwhile entertainment that has preoccupied us during these dull summer months while we await the US elections (and thank god for the UEFA EURO 2016) .

This frenzy of a market place around Brexit built a nice addendum for the long gold trade in my opinion. Gold isn't going up because of the risks associated around Brexit. Gold did however hit $1,315 highs last week, underpinning the case for a rally on a Brexit of course and admittedly, we did see some profit taking on the weekend's Bremain weighted polls coming through and over the Labour MP Jo Cox tragedy. Now, even though Gold did drop around $40 on this outcome, as if gold is going up purely on fears that Britain could be exiting the EZ project, well that simply isn't the case. Gold was topping $1,300 at two year highs not just because of Brexit fears, but because of the Fed on the 15th of June and the poor state of the US economy, a trade that I have been advocating for some time in many of these articles.

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Look, even if Britain does leave the EU, that is surely a bullish play for gold. If Britain votes to stay in the EU, that is also bullish for gold because of its negative correlation to DXY. A rally in the euro, the pound and risk on should see an unwinding in safe haven long positions in the greenback. (I wonder what that means for USD/JPY and the US/Japanese real yield differential? Well, Bremain points to inflation meaning 'real rates' are more negative and that ultimately points to a weaker Yen, so in theory, despite unwinding of the dollar, USD/JPY should rally as well). 

However, whether gold goes up on a Bremain or Brexit, or whether it goes down in fact, it will not influence my outlook on gold longer term. The case for bullish Gold is strong, from central banks that are clearly struggling to contain deflation, buying up debt and driving yields to near-collapse while sovereign debt (out to 10 years) of our industrialized nations are trading at negative rates. Look, what is the alternative to gold? Bonds? (Too much counter-party risk, and prices can't go up with the return of inflation).

Gold in 'poll' position

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Excuse the 'poll' pun in that sub-title, but to me there is no alternative to Gold, not while the Fed are on hold and toning down the dot plot. Everything got pulled back last week by the Fed, taking rate hikes off the table. When we get through this EU referendum, it will be back to business as usual one way or another and all about the Fed losing credibility within the bubble it has created, AKA the US economy, and the demise of the US dollar. That is all bullish gold longer term.

Good luck out there!

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Meanwhile, I wish you all the best on this EU referendum hope your trading plan works out for you.