BREXIT, EUR/CHF, what to do now?

bg_boe_1503999

What will happen next is very difficult to assess, and this lack of visibility is the very reason why markets should remain very volatile and unpredictable over the months to come.

Politics will outshine market fundamentals, where the UK and the EU will enter into long and complex negotiations. The British would still like to access European markets, but they want to keep control over immigration, while for the EU, free movement of people is a prerequisite to gain access to the single market. Unlike Greece last summer, Britain’s stronger economy gives them bargaining power. The EU on the other hands wants to avoid any contagion risks, hence will not make any easy concessions.

This framework of political uncertainty should keep investors generally risk-off. Businesses may also put projects/hiring/investments on hold, which does not bode well for growth. However these kind of markets will also provide opportunities. Fat tail events such as the Brexit create liquidity dislocations, causing selloffs in all shares, even those that are fundamentally sound. Hence it is important to stay liquid, for when market fundamentals kick in again. For now however, best is to look at the charts, which are clearly flashing red. Hence selling any rally should be the strategy to favour.

What about the EURCHF?

Low risk appetite will keep the demand for the franc high. Already weak inflation expectation could fall even further, undermining the impact of negative interest rate on the franc. The euro on the other hand might suffer large swings depending on how the negotiations evolve. Any fear of more countries wanting a similar referendum, would bring in fresh selling.

Having said that, despite Friday’s huge risk selloff, the SNB surprisingly managed to maintain the EUR/CHF fairly stable. This shows the SNB still has significant firepower.

The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication.