Brexit doesn't happen so often - but it does happen. Many will remember the days when Maltese Lira, Cyprus Pound, and others joined the fledging Euro. During that time it was possible to have a 400% return in your account in 1 day due to planned exchange rates on the conversion day. Now probably a flood of copy cat referendums will sweep the EU, certainly by those already in the works in breakaway regions. As we've been saying for years, the Euro finally will be shattered into regional Euros, and mixed with a return to national currencies such as the French Franc, Spanish Peseta, Italian Lira, and so on. Probably, the Euro will always exist as accounting currency, and probably will always be accepted by merchants for payment in Europe. In many countries such as Russia for example, a 3 currency system already exists. Countries that don't have strong domestic currencies often use foreign currencies as a benchmark, or a place to keep their savings in times of currency crisis. In most cases, this is primarily the US Dollar and secondly the Euro. Finally - to please all these conspiracy nuts; they are right - there is a plan to create a one world currency - but it's not SDRs and it's not the Amero, it's the US Dollar. Last night, as results came in indicating a "Brexit" - the GBP collapsed. Forex involves a pair trading system - it's not possible to just 'sell' the Great British Pound (GBP) - it must be 'bought' against another currency. That means, while the GBP was collapsing - other currencies were rising. So this event was net positive for most other currencies, most notably the US Dollar. See the below hourly chart of GBP/USD:
What this means is the GBP (Great British Pound) went down and the US Dollar (USD) went up. The USD is a net benefactor of many foreign market volatilities - not only in FX. Probably you've heard about 'flight to safety' - well since the CIA killed off the safety of this little canton north of Italy we call today "Switzerland" - the US is effectively the only 'safe haven' left. By eliminating offshore locations on a number of levels, it sucks money back into the USD which is a natural support of the USD - both domestically and USD accounts held overseas. The US has effectively an unsaid policy supporting the USD through foreign policy, including but not limited to military intervention, gunboat diplomacy, and a number of other techniques.
Hats off to all GBP FX providers that maintained superb trading conditions in a difficult volatile environment. Brexit trade was an excellent 'stress test' of what happens to when such existential events take place. FX markets functioned, and functioned well.
Day traders had many opportunities to profit, from an obvious one way trade down. Also this is an excellent example of why any investor should include FX in their portfolio. While it was easy for day traders to book huge profits last night, it could simply have offset other losses. Let's take the following trade example:
Some of the trades:
These trades were poorly placed and captured only about 5% - 10% of the opportunity, but it also proves that last night was such a one directional move - that took many hours - anybody could have made money from this move. It didn't happen all at once, it took hours - and often retraced.
From a hedging perspective, let's say the profit on this account balanced out other Brexit related losses. Most investors aren't pure FX speculators, so this is a solid example of why FX should be in any portfolio. Because this was an FX event - the GBP moved against most other currencies that it trades against. See in the above example GBPNZD, GBPMXN, GBPCHF, GBPCAD, GBPSGD, and GBPUSD.
Finally - this FX event is a strong indication that more events like this will soon come to fruition, that FX is going to be the new focus of international markets, especially in Europe. The Euro itself is in question - if countries such as Spain leave the Euro, it can start a trend that shatters the fundamental threads holding the Euro together. This will be net positive for FX and net positive for countries who leave the EU - but it will create massive volatility on all global markets, as assets are repriced and money is moved around. The good news, FX provides a plethora of methods for profiting, hedging, and investing.
While FX has received a lot of bad press recently (and for good reason) today's Brexit trade is a great example of what's possible in FX in a good way, how investors can benefit from it as speculators or hedgers to protect themselves.
Also - it's a sign of things to come - buckle up! Markets are going to experience turbulence!