How Should Traders Get Ready for Brexit?

22 June 2016, 19:09
Sherif Hasan
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With the referendum vote over the UK’s future membership of the EU being held on Thursday, traders are preparing for the possibility that the UK electorate will vote to leave the EU. With the polls showing that the decision rests on a knife’s edge, traders are well advised to be managing potential risks. There are several ways in which a trader can prepare for either eventuality on Thursday, and all or some of these steps may be appropriate for your investments:

Currency Transfers

The easiest way to prepare for Thursday’s referendum is to transfer money so as to avoid too high an investment in an affected currency pair. Obviously, the currency pairs most unstable in the current market are GBP/USD, GBP/JPY, and EUR/GBP, and these are pairs in which you should strongly consider your available options, including restricting trade amounts.

The issue is that brokerages are ahead of the game in this area, and most have already reduced their allowed leverage levels for selected currency pairs ahead of the vote. With leverage becoming ever more popular in forex trading markets, traders have gained the ability to trade with far more capital than they would otherwise have access to. With many brokerages offering leverages as high as 1:400 on forex transfers most have already altered those leverage ratios, and will continue to do so for a few days afterwards.

Currency Investment Restrictions

An option available for traders is to simply reduce the amount of currency speculation in which they engage over the next week or so. For those investors who are risk averse, this is a sensible option, and with other assets (such as gold and oil) currently improving due to global financial uncertainty and the weak dollar, there are other options available.

For investors who are happier taking bigger risks, there is a decent profit to be made should you be willing to gamble a little. With every opinion poll causing the sterling to move significantly, whether to strengthen or weaken, a trader can make a sizeable amount of money in the next few days.

Note that analysts have predicted a considerable swing for sterling whether or not Brexit occurs. Financial experts have been saying for serval months that Brexit notwithstanding, sterling is significantly undervalued, and we can expect a revival should the Remain campaign triumph on Thursday. Bank of America recently said that, “Removal of Brexit risks will see a recalibration of UK rate hike expectations and a higher GBP.” On the other hand, it is generally agreed that a vote for Remain could see the sterling lose as much as 10-15% of its value in the following days.

Speed of Action

There are only two possibilities on Thursday, but the effects either way cannot be predicted with anything remotely approaching certainty. Whilst economists have made a number of predictions relating to both possible results, no country has ever left the EU, and the economic effects are simply unknown. All traders should be ready to act quickly should the markets make sudden moves in either direction.

In summation, both the last few days before, and the days following the aftermath of the Brexit referendum are more than likely not to lead to financial upheaval. Traders are advised to keep a close eye on the forex markets, but to also take steps now to reduce risk exposure.

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