Brexit as turn point: who and what loses

If British vote for an exit from the EU, the rate can fail more than on 2000 points

The world markets prepare for panic, speculators - for withdrawal money from market plankton. Risk assets are recovered, profitability of the European state bonds rises, dollar under pressure again. Intense week remains ahead which results will determine trends on medium-term prospect.

After the 23rd market eventually shall obtain accurate information, and it not only Britain + the EU, but also terms of increase of the FRS`s rate, destiny of QE ECB, decrease of the New Zealand`s rate, mood of the RBA, shock to the Bank of Canada.

As for today the situation with brexit looks like a good planned market manipulation, though even an exit of Britain from the EU seriously practically will affect nobody - neither economically, nor financially. The most "terrible" idea which is operated by all who argue on brexit is crash of the European Union after Brexit and comparison with a recent Greek situation. But Greece is connected with Europe much more seriously - through currency (and, above all - through debts!), but also its possible exit would hardly break tough European structure.

Britain is not so critical component of the eurozone - it only a member of the economic (trade) union. Its exit from the EU will not mention at all the European financial system, so similar "horror stories" press only on psychology. Trade connections will not be broken too, changes can affect only customs, tax and fiscal regulation. Constantly published "polls" pursue exclusively speculative aims: in the closed mailing of Deutsche Bank the number of persons interested of an exit from the EU is estimated at only 20% - it`s the most real result.

But even the probability of Brexit creates precedent for the countries which are hindered the last 15 years by tough influence of the European Union and its intervention in national economies. Development of the interstate laws subordinating to Brussels the Central Banks and fiscal bodies of the states, the majority of the strong countries consider as sovereignty loss threat. And Germany - the first in these ranks.

Even if to consider that Britain has not accepted the majority of the European conditions, including the Schengen agreements, today obviously more profitable for it to remain in the EU. According to FT, the average English household "invests" about £300 a year in economy of the EU, but at the same time indirectly receives about £2500 due to reduction of prices, duties and other privileges of membership in the Union.

The problem is obviously forced by politicians. Refugees became the last straw for British. Even if to consider that Britain`s requirement are completely considered in migration policy of the EU - today it takes only those refugees which wants to take - the factor of refugees is actively used in the anti-European promotion. And this with the fact that at present the amount of taxes which Britain receives from refugees considerably exceeds the amount of benefits which should be paid.

From the point of view of the market even if the question of brexit would not arise at all, then both euro, and pound were at the same levels today, but now as a result of accurately planned market panic, in case of an exit there will be a sharp fall of eurocurrency, differently - growth. After murder of Joe Cox the market has coolly grown up on GBP and EUR, both parties of agitators have suspended the campaigns before a referendum. Chances of preserving Britain as a part of the EU have obviously increased.

Everything that concerned FRS last week - within expectations, rates have not touched, and reaction of dollar to it was more than reserved. FRS continues to participate in the world performance with the British referendum. Any result will not affect the domestic market of the USA in any way - it is an event not of that scale, but there is a reason for own failure to act. Many people consider a referendum as the factor, which has prevented a raising of the American rates in a current month, though there is no direct link between these facts. Nevertheless, chances of a raising of rates in July have significantly grown.

From other events of last week it should be noted yen – after all it has punched a barrier 104.00 after the decision of Bank of Japan to keep rates invariable. This week large and traditionally appeasable Japanese banks for the first time have actively opposed further decrease in rates. One of three largest banks of the country, Tokyo-Mitsubishi UFJ (BTMU), has refused the status of the primary dealer of government bonds of Japan. It has been perceived as direct refusal to finance a huge public debt. Uncertainty with brexit affects Japan much more sharply, than on any other Asian economy - the Bank of Japan expected on reduction of the rate in attempt to leave two decades of a never-ending deflation, but nevertheless the yen continues to grow as a traditional safe asset. First of all it interferes with development of export sector of Japan, and therefore the probability of renewal of intervention in the next weeks is very high.

In case of Brexit perhaps fall of USD/JPY lower than 100.00 and GBP/USD lower than 1.30-1.20, and therefore we should waiting for currency intervention from the Central Bank of Japan and the Central Bank of England within several days. The ECB in solidarity can join interventions. We wait for performance Draghi and Yellen today - they will explain obvious again, promise unreal and actively frighten by consequences. Any other factors not are able to cause essential movements this week. The English statistics will be interesting only after Brexit.

EUR/USD: zone of large options with closing within a week: 1.1420-1.1500, protection of market makers at the level of 1.1450. In the next two days movement above a mark 1.1400 is improbable, an optimum side channel 1.1320-1.1400. Real strong support - 1.1250.

GBP/USD: according to analysts if British vote for an exit from the EU, the rate can fail more than on 2000 points, to a mark 1.2000. For today a zone of large options with closing within a week: 1.4680-1.4750, protection of market makers at the level of 1.4650. Optimum side channel 1.4580-1.4650. Real strong supports - 1.4450.

Until the publication of results of the referendum the markets will keep low liquidity that can provoke "empty", but "long" volatility, and also sharp jumps of spread due to the lack of the prices in almost empty market. The one basis - inquiries and exit polls, to which GBP will react extremely sharply. Reasonable brokers for the sake of own safety on liquidity of means limit trade with euro and pound, expand spreads and increase mortgage requirements.

Author: Alexander Ward,
ForexChief Currency strategist