Talking Points:
- Latest YouGov poll for UK-EU referendum: 51% Remain, 49% Leave
- Retail crowd pares GBP/JPY longs and remains net-short GBP/USD ahead of Brexit vote.
- FX volatility is set to remain high with Brexit vote tomorrow - it's the right time to review risk management principles to protect your capital.
This is the most recent update in our look at retail crowd positioning ahead of the UK-EU referendum on Thursday, June 23. Learn more about SSI and its relationship with price and Brexit developments in our first update, “Retail Crowd Flips Positioning in GBP/USD on Approach to Brexit Vote.”
A summary table of current positioning is listed below, noting the SSI ratio, open interest by pair, and changes in positioning by pair over past day and week.
Speculative Sentiment Index (SSI) Statistics:
With the UK-EU referendum on the horizon, there are two pairs that are of obvious interest to us over the next 48-hours: GBP/USD and GBP/JPY. The reason is fairly obvious – tomorrow’s UK-EU referendum vote, cherishingly known as the Brexit vote. With 1-week annualized volatility pricing in a +/- 3.9% move around the results, there’s a high degree of necessity to actively manage risk if you’re going to be engaged in markets through Friday’s close.
One way to monitor risk is to monitor positioning. As we’ve previously explained, we monitor retail crowd positioning because, statistically speaking, the retail crowd is analogous to the commercial hedger in the futures market. That’s to say that the retail crowd, like commercial hedgers, tend to be: shortest at the market top; longest at the market bottom; and on the wrong side of the trade for the meat of the move.
Likewise, applying some common market knowledge that it’s not good to be in a crowded trade, we’re inclined to watch what the retail crowd is doing, particularly when the retail crowd (for lack of better phrasing) crowds into a position.
With that said, for some time now, the retail crowd has been reliably on the wrong side of the downtrend in the British Pound, particularly throughout the end of 2015 and early-2016. Ahead of tomorrow’s Brexit vote, and after the latest YouGov poll showed the ‘Remain’ side ahead at 51% to 49% for ‘Leave,’ the retail crowd remains net-short GBP/USD, which they have since the start of the week when GBP/USD initially jumped through $1.4500.
Chart 1: GBP/USD Daily SSI Chart (June 2013 to June 2016)
The ratio of long to short positions in the GBPUSD stands at -1.13 as 47% of traders are long. Yesterday the ratio was -1.15; 46% of open positions were long. Long positions are 9.9% lower than yesterday and 44.0% below levels seen last week. Short positions are 11.3% lower than yesterday and 3.6% above levels seen last week. Open interest is 10.6% lower than yesterday and 31.0% below its monthly average.
We use our SSI as a contrarian indicator to price action, and the fact that the majority of traders are short gives signal that the GBPUSD may continue higher. The trading crowd has grown less net-short from yesterday but unchanged since last week.
Chart 2: GBP/JPY Daily SSI Chart (June 2013 to June 2016)
In GBP/JPY, there are clear signs of traders reducing exposure despite the headline positioning ratio. The ratio of long to short positions in the GBP/JPY stands at 1.84 as 65% of traders are long. Yesterday the ratio was 1.77; 64% of open positions were long. Long positions are 12.8% lower than yesterday and 39.0% below levels seen last week. Short positions are 16.2% lower than yesterday and 32.4% below levels seen last week. Open interest is 14.1% lower than yesterday and an incredible 36.4% below its monthly average.
The trading crowd has grown further net-long from yesterday but moderated since last week. In context of the dramatic decline in open interest, this is not a reliable signal. A tenet of technical analysis is that strong trends are supported by increasing participation. Falling open interest in GBP/JPY suggests that participation is doing just the opposite. The combination of current sentiment and recent changes gives a further mixed trading bias.
For more information on SSI, please visit the DailyFX Sentiment page.
Read more: Brexit Analysis Directory
--- Written by Christopher Vecchio, Currency Strategist
To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com
Follow him on Twitter at @CVecchioFX
FX volatility is set to remain high with Brexit vote tomorrow - it's the right time to review risk management principles to protect your capital.
