The following is a guest post by Brad Alexander, CEO, FXLarge.
Just last week a student asked me, “How do we trade Brexit?”
“Well”, I responded, “There are two options: the easy one is to simply avoid trading Cable and all the Pound Crosses, until the final resolution sometime during this century or, use the new Rising Follicle Indicator.”
“You take your laptop and camp outside Boris Johnson’s house. If he emerges in the morning, and his hair is parted to the right, you short Sterling. If it’s parted to the left, go long.”
She looked away thoughtfully and, after what seemed like an eternity, looked for clarification with a very critical question, “His left, or mine?”
(That was NOT “trading advice”. Please don’t report me.)
But seriously, many traders, both retail and professional are choosing one side of the fence or the other. Many hedge funds recently surveyed are clearly staying away from the pound until the dust settles. Other traders see the volatility as a great opportunity.
Here we are, 8 months away from the deadline, and the UK government is no closer to a deal; either a hard Brexit, a soft Brexit, or a crunchy on the outside but creamy on the inside Brexit, or the dreaded “no deal”.
Combing the news, it seems that the previously unheard of, “no deal” could see Cable drop to $1.15 or rise to $1.41 with a soft Brexit. One story had the Pound dropping dramatically, “the day after” the deadline. The pound will certainly drop in this scenario but it won’t be, “the day after”. We will see this coming a long way away, sort of like the proverbial headlight of a train rushing toward us from the other end of the tunnel.
Of course, between now and the deadline, 29 March 2019, anything can and will happen.
We recently had a serious “litmus test” with key resignations from the UK cabinet. If you caught my Market Blast video last week, I showed how the resignation of David Davis — Brexit Secretary — actually caused a weekend gap to the upside and the Pound strengthened. Upon the resignation of Boris Johnson, however, the Pound dropped dramatically for 3 hours.
This is not the first time Boris has moved the markets and we are certain it won’t be the last.
By the way, I speak on behalf of all forex traders in that we appreciate that his decisions, good, bad or indifferent, occur during market hours, when we can actually have some fun with them. David Davis, on the other hand, resigning on the weekend, didn’t help us at all. Don’t these guys know anything about market liquidity?
I would highly encourage anyone with any global clout to reserve major referenda, policy decisions, polls and resignations, to Wednesday to Thursday, between 8 am to 11am GMT, when market liquidity is, let’s say, useful.
Getting back to Brexit, another way to sort this out is the manner suggested to UK Prime Minister Theresa May by Interim US President Donald Trump… sue the EU! Of course, no one has any idea why, or how this would play out, but it is certainly worth some thought…at least for another blog.
Some time ago, pre-Brexit, I wrote an article called Schrodinger’s Brexit where I postulated that the whole concept was similar to a Schrodinger’s Cat experiment and we would not know what was going on until we “opened the box”. Notwithstanding the hate mail from animal rights activists, my audience, for the most part, understood the concept.
So, post-Brexit, we opened the box. Inside we found, more boxes…and more cats…and more boxes…and more cats! Some cats were alive, some cats were dead, most cats were confused and none of them spoke the same language.
Here we are, 8 months from the deadline to ratify the agreement and we know that all we can expect is turmoil. Will the UK government fall? Will negotiations stall and drag on to a “no deal” scenario? Will we see a new referendum?
Regardless, it will be a fun ride for currency traders and the choice is simple: get on the bus, or get off at the next stop.
In the meantime, if you find yourself in London SW1, waiting for a real bus, and a young lady trots by with an iPad displaying cTrader…stand back. She’s on a mission.
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