XAUUSD, Weekly           

The impact of Brexit on the UK: Less than two weeks after the vote and, as Carney put it yesterday, the risks of the vote to leave the EU “have started to crystalize.” A YouGov CEBR survey this week found that 49% of the UK businesses it polled as being pessimistic on the economic outlook, up from 25% from before the referendum. The same pollster saw its consumer confidence reading fall to 104.3 in the days after June 23 Brexit vote, down from 111.9 for the first three weeks of June. There was also the news that three major property funds run by Aviva Investors, Standard Life and M&G have halted investor redemptions due to a lack of liquid holdings in what the former describes as “extraordinary market circumstances.” There are also growing anecdotal signs of slowing activity in such sectors as the housing and automobile markets. Most economists are anticipating a recession, driven principally by a drop in investment. Assuming this turns out to be the case, which we think it will, it will be interesting to see if this makes it politically viable for politicians to backtrack on Leave campaign promises to get a better trade deal with the EU, and whether sufficient momentum builds for a second referendum on EU membership.

The trade deal situation is far from clear the Norwegian solution will be the preferred from an economic view but the Norwegians have free movement of people, something the Leave group could not accept. A good old political FUDGE, (to “deal with something in a vague or inadequate way, especially so as to conceal the truth or mislead”) on principles and fundamentals is in the air once and if Article 50 is invoked (which now looks unlikely until January 2017).

How do we trade this situation? As ever financial markets are driven by fear & greed, sentiment, fundamentals and technicals. At the moment sentiment is THE main driver of Sterling and there are very high correlation trades available in this significant risk-off environment.

Yesterday I wrote “GBPJPY can trade lower still from these levels (134.00), the next Support is at 131.50, 128.50 and 125.60.  However, as we move lower these targets become more difficult to achieve. Momentum is to the downside and although technically oversold, never underestimate the power of fear and greed”.  The drive lower continued and first target support area was breached overnight.  Target 2 at 128.50 and lower down to 125.60 remain.

On Friday (July 1) I anticipated a retrace for USDGBP to 134.50 before 130.00 was reached during Q3. The retrace did not happen as sentiment overtook the technicals and 130.00, 129.00 and even 128.00 were broken, before a sharp retrace to the 129.800 level this morning.  Target 2 at 125.00 is still a target in the weeks ahead.  

The sentiment and mood of the post Brexit market has also encouraged the correlation trade. Gold and other commodities (particularly Silver and Copper) continue to rise and yield on government and corporate bonds plummet as prices rocket. Gold currently at 1370 has weekly target 1 1394 and 1428 further out.  Silver has upside targets at 21.06, and 22.19 & 23.00 further out.

As traders we require volatility, the Brexit vote has created that additional spike to volatility and until new levels are established, lows can get lower and highs can get higher.  The old adage “Trade what you see not what you think” and strict risk management are rules that come into their own in these very interesting times.     

Janne Muta

Chief Market Analyst

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