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Video: The Market's Risk is Far Too High with Brexit Upon Us

Video: The Market's Risk is Far Too High with Brexit Upon Us

2016-06-23 02:45:00
John Kicklighter, Chief Strategist

Talking Points:

  • The EU Referendum vote begins in the upcoming London session and volatility will reflect its complexity and risk
  • Sterling isn't the only currency at risk - Euro, Dollar and Yen are exposed leaving few 'tradable' options
  • I cut out of my USD/JPY short position given its complicated exposure to risk trends

See how retail traders are positioning in the majors using the SSI readings on DailyFX's sentiment page. Having trouble trading in the FX markets? This may be why.

The threat of volatility for the broader market is exceptionally high through the final 48 hours of the trading week. It is difficult - if not impossible - to get far enough from the Brexit risk to find reasonable risk-reward scenarios that can be found through rational analysis. To take trades now, assumptions would need to be made on the outcome of the vote. And, the impact from this event can be severe. What's more, the market is underweighting the disruptive outcome (a UK break from the EU) which further leverages the impact of the globally-troubling outcome.

Not only is the Pound buoyant in the face of severe risk, but broader capital markets are troublingly blase about the threat. While implied volatility levels are elevated across asset classes, we also find benchmarks like the S&P 500 within arm's reach of its record high. This has been the general state of the speculative rank for some years now, but there has been an appreciable rise in concern and anxiety. That capriciousness only limits perceived upside on a status quo outcome and incalculably leverages the risk.

With the implications to risk trends with this event, I have decided to exit my long-term USD/JPY short. A position intended to take advantage of an eventual but inevitable deleveraging in global risk markets - though it has yet to truly happen - the intensity of the threat causes problems for the sentiment bearing the pair is likely to trace out. After the outcome is known or event assumed by the majority, opportunities will likely arise in abundance. Yet, the risk of getting it wrong going in is simply not worth it. We follow the descent into this risky period in today's Trading Video.

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