It’s Going To Be A long Night For Markets – BofA Merrill

It’s going to be a long night for markets The campaigning is nearly over and by the end of this week, we will know whether the UK has decided to remain within the EU or not. From its beginnings as an idiosyncratic UK story, the EU Referendum has now become the bellwether for broader moves in risk as recent opinion polls have shifted in favour of leaving the EU. The consensus is that Remain will win because voters will gravitate to the status quo but turnout remains key.

For investors, with the vote on a knife-edge, we continue to recommend hedges to portfolios. It promises to be a night full of political intrigue.

Voting will be between 7am-10pm BST. The first significant piece of information will be the size of the turnout at around 1am BST on 24th June. Results will trickle in through much of early Friday morning before the official announcement which is expected around mid-morning on 24th.

We see a vote to Leave as leading to a flatter curve and USD strength on the back of flight-to-quality flows. A remain vote could lead to the opposite as pre-emptive safehaven flows are unwound, though a re-pricing of Fed expectations would limit the extent of dollar downside.

If the UK does vote to leave the EU, then USD/JPY is likely to fall decisively below 100. The MoF’s intervention probability would increase. If the UK votes to remain in the EU, then USD/JPY would likely rebound on improved risk sentiment, but this is unlikely to end the yen’s cyclical strength yet. Vol/Quant insights: Looking for hedges EURUSD realized vol could continue to outperform USDCHF vol as USD correlations break down on Brexit concerns.

EUR/JPY and EUR/CHF are attractive hedges for the UK EU referendum. The MAA downtrends in EUR crosses are less extended than for GBP pairs, suggesting EUR is not fully pricing-in downside risks. Meanwhile, the Residual Skew for EUR puts has already increased for all pairs.