UK citizens will be asked to vote on the European Union referendum on June 23rd 2016. The referendum aims at asking UK citizens if they wish to stay in or leave the European Union. While it may not sound like a big deal for many people, it does matter for a lot for investors. In the event of a Brexit, the financial markets could experience an historic rise in volatility and the British Pound could experience its biggest move of the 21st century. Many analysts have highlighted the fact that polls have recently shown a far higher risk that the UK will leave the Union. Given the increasing risk, many forex and CFD brokers have raised their margin requirements. These brokers simply try to avoid the same problems faced on the Swiss Franc when the currency surprisingly appreciated by 20% in January 2015.
How to trade the Brexit? Stay or Leave
Although there is fierce debate over whether a Brexit would strengthen or damage the British economy in the long run, there is no doubt that it would initially trigger a sharp fall in the British Pound. Analysts at HSBC forecast that sterling could lose up to 20% of its value against the dollar. On his side, Bank of England Governor Mark Carney has warned that a Brexit represents the biggest threat to Britain’s economy. Considering the mounting pressure as we draw closer to the referendum date, the price and volatility of USDGBP trading instruments have raised way too far to consider entering them now.
Non-direct ways to trade and profit from the Brexit
Wait for buying opportunities.
One way to trade the Brexit is to not trade it. Indeed, if the public votes for a Brexit, the UK equity market is likely to suffer a strong correction. It would then be the time to buy high-quality names at a discount. Especially quality names that drive a significant portion of their revenues from foreign countries that would gain in competitiveness.
Short the Euro-Dollar exchange rate.
Another great way to trade the Brexit without paying the costs of the recent uncertainties is to switch your focus to short EURUSD trades. In a Brexit outcome, the focus is likely to quickly shift to the problems this would create for the Eurozone as whole. Further stimulus from the European Central Bank to stem the crisis will also likely result in a weaker euro.
Short Banking stocks
Many analysts have recently recommended to cut your exposure on central and peripheral European assets. These assets are likely to suffer in a Brexit event. The sectors that could fall the most are Banks and more generally Financials. These sectors will not only suffer the consequences of a potential Brexit but also the policies that will try and stem the contagion to Europe and to the world. US Central bank chairman Janet Yellen has mentioned that the referendum is a concern and a Leave vote will most likely create turmoil that would prevent any fed rate hike until December. Low rates are killing bank as it reduces their margins and any rate hike cancellation would further weaken their revenues.
If you believe that UK citizens will favour the “stay” vote, you may do all the above trades in the opposite direction. You must basically go long European and British equities as well as currencies.
Almost all our recommended binary option brokers propose all the relevant tools to trade and try to profit from the Brexit referendum. IG binary has even created a specific binary option to speculate on the vote outcome. Don’t hesitate to have a look at our IG binary review and our ETX Binary review if you wish to trade with an FCA regulated broker.