IMO the first rule and most important is - DONT TRADE THE VOTE.
Trying to guess the answer is like trying to win the lottery, so instead i advise taking a position on the volatility, as doesnt discriminate, it trades both ways.
Trading the volatility:
- The asset most hit by the UK EU Referendum uncertainty is FX, with GBPUSD 1wk ATM implied closing the week at a whopping 48% - as high as levels from the financial crisis.
- GBPUSD spot and price is trading somewhat at the mercy of the UK Polls (i suggest checking them every few hours or so for updates if you want to trade any GBP or JPY pair the next two weeks) - intuitively, when the polls have been BREXIT biased - as they were at the front of last week, we saw GU plummet to 1.40 flat and then towards the end of the week as the polls tipped towards bremain, we saw GU recover somewhat to 1.44 almost.
- I expect the same at the start of this week - GBP will open higher today as polls over the weekend tipped into BREMAIN's favour - supported by the tragedic murder of one of its supporters which consequently lead to a prohibition on campaigning and the "stay" party gaining more publicity).
-Therefore I suggest SHORTING GBP rallies as with trading at the 48% level, probability supports that GBP wont be able to hold onto any strength and will at some point conceive considerable downside. Further, the BREXIT/ BREMAIN Polling balance is likely to toss and turn - (http://www.bbc.co.uk/news/uk-politics-eu-referendum-36271589) - so Fading/ Selling rallies on the back of any new BREXIT/ Leave Polls out is advisable.
- GBPUSD - SELL @ 1.45/6 - lows of 1.40 from last week or 1.385 is the next for TP
- GBPJPY - SELL @ 151/2 - Lows of 140.5 is the next support past 148, however, 1.455 are lows from last week
- GBPCHF - SELL @ 1.39/40 - Lows of 1.338 are in sight for TP, or 1.358
- Reward for all is upward of 500pips, Risk is no more than 250pips so IMO this provides a great trading opportunity
My 3 conditions for shorting GBP on rallies is:
1. GBP must be trading "expensive" at the levels suggested above - making reversal more likely.
2. A recent poll is in favour of leaving
3. is high and Risk Reversals trade in favour - both putting a dampener on long term stability.
See my previous articles on which cross is best to trade - I still believe CHF is the best cross, it has the best long run SHORT possibilities too.
Finally, Safety assets e.g. Gold and US Bonds are tradable ON PULLBACKS also. Gold and Bonds have been on significant rallies (illustrating the market risk) recently, so I advise buying them on any 1-5% pull backs that we may/ may not get - However, the risk-off asset play was much more profitable several weeks ago (as i suggested). Much of the "easy liquidity" has been eaten up in the last 2wk rally - hence only buy pull backs.
In my opinion, the front end of the week will have the best conditions to trade in, will be at its highest and i predict a level of "calmness" emerging on Wednesday/ Thursday as the result is awaited and as drops, thus I do not recommend trading on Weds/ Thurs - execute on the rallies expected on Monday and TP before Wednesdays London session at 8am GMT .
On a UK STAY VOTE we could see massive 5-8+% rallies in GBP (depending on how depressed it is) and mirrored strong sell-offs in JPY, Gold and Bonds - hence why i say DO NOT TRADE THE VOTE.
I will be posting updates on as soon as the market opens.
The price action of GBP pairs is somewhat compromised by its high volatility (e.g. price action is so volatile it is hard to calll tops) so instead use UJ which is trading with discipline.
1. When UJ falls, this CONFIRMS GBP downside - as it shows a tightening of risk appetite, Lower GBP is the risk-off play.
2. When UJ rises, this CONFIRMS GBP upside - as bets on GBP upside is the more risky move given the absolute event uncertainty, thus JPY weakening confirms the market wants to take more risk with GBP upside plays
1. we have a "Leave" bias poll 45% vs 44% (3000 people).
2. UJ is selling off indicating a risk-off shift in the market which supports gbp shorts.
3. Shortly ago we were at key handles, GU at `1.47 mid, GCHF at `1.41 mid which was perfect resistance levels to get short.
I expect us to now realise some downside volatility e.g. GU to 1.42 and GCHF to 1.38
You can have a personal update:
1. I am not looking to take any risk at the moment - the options market is going crazy, we have an inverted volatility smile curve (rarely ever seen), whilst GU and GCHF volatility is trading at 120%+ which is 50% greater than back in 2007/8.
2. Nonetheless, we are seeing 50% more demand for downside options vs upside options, this indicates that the market is likely covering the BREXIT potential and/or wanting to own some GBP downside as gbp trades expensive at the moment.
3. In the spot market, we are seeing GBP stronger across the board, with UJ reaffirming the GBP higher move as it also trades higher (risk-on attitudes).
4. My best play in this market, given that the market hasnt realised the downside i expected (1.42 etc), is to fade/ sell the extremes we see on thursday/ friday.. e.g. I will probably short GBPUSD and/ or GBPCHF on friday once the highs have been realised (assuming they vote stay), as historically, GU doesnt hold the rallies from a "remain" vote and i think this will be the case for this vote too (e.g. any rallies wont hold for more than a few days).