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Strategy Video: Dollar's Safe Haven Exposure to Brexit Risk

Strategy Video: Dollar's Safe Haven Exposure to Brexit Risk

2016-06-22 01:31:00
John Kicklighter, Chief Strategist

Talking Points:

  • While the Pound and Euro are closest to the impending Brexit risk, the event's impact can very well be universal
  • The Dollar is the primary safe haven in the face of a 'Leave' outcome given its primary reserve status
  • Expect the USD's sensitivity to risk ebb and flow to remain high with particular severity during and after the vote

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.

Global investors are paying close attention to the approaching Brexit vote after receiving regular warnings by policy officials that the risks are systemic. That puts global equities, carry, high-yield assets and other high-risk/high-return assets directly in line of fire of the highly-anticipated vote Thursday. Yet, if the risky assets are tuned in, so too are the havens. Given the scale of the threat, the focus turns to the most extreme outlets for safety. And, at the top of that list is the Dollar as the access of entry to the world's largest economy and US Treasuries.

Over the years, the Greenback's appeal as a safe haven has diminished significantly as the severe swells of fear have abated and a focus on monetary policy offered a contrast in central bank-distracted markets. As the significance of the Brexit vote has spread anxiety throughout the markets though, we have seen the currency returns to its baser instincts. Tumbles in risk trends around the 'Leave' poll swing on June 10 and 13 lead to a distinct Dollar rally while the 'Remain' reversal to start this week saw a USDollar gap and extended decline. This shows a greater degree of sensitivity on the risk front with an event that promises a heavy systemic impact.

For the Dollar, the traditional aspects of safety apply: it is the currency that offers entry to the world's largest economy and its most regulated financial system. However, there is an even deeper appeal that can intensify the fundamental connection and ultimately define the scramble for liquidity - particularly in the event of a Brexit. Should the UK vote to leave the EU, the recession warnings will undermine the Pound, the Euro will undergo a crisis of confidence as the risk of further exits will surge and the threat of direct intervention disrupts the Yen's haven appeal. Collectively, that represents systemic risk for the world's fourth, second and third reserve currency respectively. There would be no viable alternative for reserve rebalancing besides the Dollar. We discuss the Dollar's intense volatility connection to the Brexit - and thereby its risk tie - in today's Strategy Video.

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