The bookies don’t think that a UK Brexit will happen, and financial markets, after flirting with the idea last week, have been forming a similar view.
However, that doesn’t mean that it should be taken as a given, as almost all of the risk for stocks, commodities, higher-yielding currencies and high-yield credit are entirely skewed to the downside.
While the vote is a binary outcome, the subsequent market reaction will be asymmetric. A so-called “Bremain” outcome may see a small pop in risk assets, but a “Brexit” could create some serious market carnage.
Martina Song, Richard Franulovich and Robert Rennie, of Westpac’s FX strategy team, are not taking any chances before the UK referendum outcome is known, squaring up all of the banks high conviction FX trades ahead of the event.
In a note out today titled: “High Conviction FX Trades: We are square”, the Westpac team summarises its high-conviction trading positions thus:
Here’s the trio’s view on the outlook for the Aussie:
With the Brexit vote almost upon us, now is not the time to make a strong argument about the near term direction for the AUD. However, assuming that ‘Remain’ wins the day (this remains our base case) then we expect AUD to continue to push modestly higher.
Given the risk-reward of running open positions into the event, it’s easy to understand the view adopted by Westpac.
Risk 1000 pips, or more, in order to make 100. Might work for some, but certainly not the most appealing of trades to hold.
Business Insider Emails & Alerts
Site highlights each day to your inbox.