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With less than two days to go until the results of the Brexit vote are released, the markets seem a bit calmer at time of writing. The gold price is reflecting more confidence that the UK will remain in the European Union and the GBP is continuing to inch further up against the USD. Indeed, it is close to highs for the year.

UK spread betting firms are continuing to increase their margins ahead of the vote, which some commentators are now calling “a big binary risk event.” A consensus among big traders is emerging that the UK will vote Remain, but should the country vote to leave, then the opportunities for traders will be even larger. Some volatility opportunities will kick in immediately, others will be more long term – e.g. shorting companies in certain sectors that could be negatively impacted.

At the moment, for example, there remains solid appetite for buying oil whenever it slips below $50/bbl, but a Brexit vote could see the oil price drop further, at least temporarily.

The GBP spectacularly posted its biggest gain in eight years on Monday. Sterling is considered the most visible measure of global investor attitude towards the referendum. The GBP had been swinging wildly last week as each subsequent poll was released. The FT’s own ‘poll of polls’ sees the campaign as a neck and neck battle with 44% in either camp, and 8% still undecided. That 8% will prove critical in the next couple of days, when fear of the unknown begins to assert itself.

Hedge fund manager and financier George Soros, who has had more than his fair share of history with sterling, betting against the GBP when the UK famously crashed out of the ERM in 1992, said in The Guardian newspaper on Monday that a vote to leave could see the week end with a ‘Black Friday’ for UK assets.

Short term gains in gold

HSBC and other commentators have been placing plenty of emphasis on the gold price, with HSBC forecasting gold at $1400 if the UK votes to leave, while downside was called by the bank at $1220. Net long positions on gold are up by nearly 30% to a record high of 229,200 in the week to 14 June, according to Commerzbank. Commercial traders of gold are net short, considering the price already too high. They will stand to make money on the downside, if the UK votes to stay in the EU.

Thomas Kendall, an analyst at ICBC Standard Bank, said gold would probably drop 4-5% if the Remain camp is successful. However, if the Leave camp succeeds, a rise in the gold price is less likely, particularly over the medium term, as investors will probably buy USD and Treasuries as a safe haven, rather than gold. In addition, some investors may liquidate gold holdings in order to generate cash at a time when equities are falling.

There is historical precedent for this process: gold fell to a near 14 month low in September 2008, at the height of the global financial crisis. Traders are unlikely to see a fundamental bull market in gold should the UK decide to leave the EU.

Predictwise, which aggregates forecasts, sees the UK staying inside the EU, with a 75% chance overall. Investors are also net long on crude oil (WTI contract) going into trading today (21 June). This according to Swedish bank SEB.

CFD and spread betting brokers raise margins

Many CFD and spread betting brokers continue to raise margins ahead of the vote – InterTrader Direct has announced hikes to 5% on margins for the GBP and EUR major forex pairs and all minor forex pairs featuring the EUR. Their UK 100 index CFD is up to 5% from 0.5%, while even gold has been raised from 1% to 5%.

Saxo and Philip Capital had already raised collateral and margin requirements earlier this month. New York-based FXCM raised its margin requirements on GBP and EUR forex pairs, while IG Markets has raised margins progressively on the FTSE 100 and all sterling pairs throughout June. IG said it would be raising margin on GBP currency pairs to 6% today, and warned clients that margin rates on open positions could rise in the next 24 hours.

Brokers learned to their cost what sudden fluctuations in currency markets can mean when the Swiss National Bank decided to free float the CHF last year. In the case of FXCM, it had to be supported for a while by Leucadia National Corp in order to meet regulatory capital requirements.

Financial Spreads has increased server capacity as a precautionary move ahead of the referendum, and has said it is expecting over 95% of bets to come through websites and mobile devices. It warned clients to deposit 8-10 times more cash than normal in order to avoid trades being closed due to high levels of volatility.

Volumes in the GBP and EUR markets were seen to be lower today, following the heavy buying of GBP yesterday. Analysts of the forex markets considered this to be because traders were laying low, and that most of the frantic activity awaits on Thursday night, when the votes are counted. Because the UK share markets will have closed, most of the action will be in the currency markets, and potentially FTSE futures. Polls will close at 22.00 UK time on Thursday, and a clearer indication of results may not be available until 02.00 at the earliest on Friday. Traders who plan to be trading actively overnight had better get some sleep tomorrow!

Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

Stuart Fieldhouse

Stuart Fieldhouse

Stuart Fieldhouse has spent 25 years in journalism and marketing, including as a wealth management editor for the Financial Times group, covering capital markets and international private banking, and as an investment banking correspondent for Euromoney in Hong Kong. He was the founder editor of The Hedge Fund Journal.

Stuart has worked at CMC Markets, supporting the re-launch of its global financial spread betting and CFD trading platforms. He is also the author of two books on trading, published by Financial Times Pearson. Based in The Armchair Trader’s London office, Stuart continues to advise fund managers, private banks, family offices and other financial institutions.

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