Expert opinion

On 23 June, the UK will hold its long-awaited referendum for voters to determine whether to remain in, or leave the European Union. Although the run-up to the event has been long and dragging, very crucial questions regarding possible outcomes, consequential scenarios and market reactions have only come to the fore in recent weeks. In this note, we summarise what we think are the most important facts and figures surrounding the event.

Unfortunately, we cannot forecast the vote outcome with any degree of certainty. Until recently, opinion polls and bookmaker odds saw the “Remain” camp in a more or less clear lead over the “Leave” one. However, in recent days, the odds have swung significantly in favour of „Leave”. In addition, both bookmaker odds and opinion polls have proven to be unreliable forecasters in UK elections and the Scottish referendum, so it would seem unwise to rely on them. Given the recent swings in public opinion and the narrow margin between the support of the two campaigns, we believe that the outcome of the referendum is too close to call.

To that extent, a Brexit is a very real threat, and thus, we look at some crucial what-if questions in a macroeconomic context. Since there is no precedent for an EU exit, forecasts are hard to make, but building scenarios based on plausible assumptions should help find some guidance for the time after the referendum.

Pair’s Outlook
The Cable managed to erase intraday losses and trade flat on Thursday, amid two main opposing referendum groups suspending their campaigns. The main support area, represented by the Bollinger band, the monthly S2 and the weekly S1 was confirmed once more, suggesting that a drop below the 1.41 level is doubtful, at least for now. However, technical indicators insist the GBP/USD pair is to continue weakening today. With no solid fundamental impetus present, the Sterling has the potential to erase this week’s losses completely, but only if the immediate resistance in face of the monthly S1 at 1.4288 gives in.

Nothing surprising came out of this SNB meeting. The increase in the oil price is the main explanation of the upward revision of the inflation outlook. However, the effects of oil are short-termed. In a couple of months, this should disappear. The SNB sounds a bit too optimistic, in our view, on the US and European outlook, which will be also key to its monetary policy. Things might be slower than what the SNB displays.

The latest Fed minutes had opened the door to a second rate hike in response to continued solid consumer spending figures, an acceleration in demand for credit, and a squeeze on wages, as the US is almost in full-employment. However, the latest job creation figures (38,000) dashed hopes of a rapid rate hike.

The central bankers have been desperately trying to promote growth with zero and negative interest rates coupled with massive injections of liquidity into the global economy without much success.

Similarly to the Scottish independence referendum in 2014, markets are starting to get nervous two weeks from the Brexit vote. A single poll by an independent newspaper showing 55% in favour of Brexit, was enough to spur doubt among investors. The volatility on European markets spiked up and oil fell 3% last Friday. The EUR/CHF is also particularly affected with 1 month implied volatility reaching the highest level since the summer of last year.

According to the latest report, the US crude futures advanced for a third consecutive day on Wednesday, reaching new 2016 highs. The US benchmark posting a nearly 11-month closing record. On the New York Mercantile Exchange, West Texas Intermediate crude for July delivery added +0.62% and rose 87 cents, or 1.7%, to settle at $51.23-showing the highest close for a nearby contract since July 15. Meanwhile, August Brent crude, increased 0.42% the global oil benchmark, reaching $1.07, or 2.1%, to finish at $52.51 a barrel on London’s ICE Futures exchange, its highest close since October. According to the analysts, futures were affected in a positive way boosted by reports of another attack on oil facilities in Nigeria. They were also buoyed by data from an industry trade group, the American Petroleum Institute, which on Tuesday said that US crude inventories had fallen by 3.6 million barrels. Also, crude found support from continued supply disruptions, as well as China import data and a decline in crude inventories.

The SNB foreign currency reserves came out this morning. They were significantly higher than the previous month (602.1bn vs 587.6bn CHF). This is the highest number ever for the SNB, which keeps increasing its reserves since early 2009 and dramatically accelerated since 2012. This shows what, intuitively, we thought: the SNB is still intervening massively to stabilize the EURCHF exchange rate, which is trapped in the 1.10-1.11 range since late April, and almost always above 1.09 since January. And this is not going to stop.