BREXIT EFFECTS ON TRADING SYSTEM’S SUCCESS

Markets are closing in on one year anniversary of the Brexit vote and seven months have passed since the flash crash British Pound Sterling experienced on Friday, 7th Oct 2016 during Asia trading hours.

This article describes how Brexit vote event and GBP flash crash market event influenced short term developments for investors. This article looks at both events as investment opportunities.

 

INITIAL DROP

Brexit vote was widely followed and covered by the market as the voting process developed. During early stages of the vote the market was actually showing tendency of GBP appreciation and there was strength in the currency.

Obviously, the strength reversed and during several hours of the vote Sterling lost 10%. Even though it seems like a big move in price, the point here is that the drop in price during the vote took several hours, during the daily process so to speak. During this process, currency exchange pairs fluctuated by more than 4%. There were several opportunities during the time of these events that enabled investors to earn pretty large margins by the end of the day.

At that time the GBP was sitting low understandably. Nevertheless, real losses were less than because of ample oscillation in the price. After that in the wider market GBP has been sliding mostly. It did not fall through the floor. It experienced a pretty gradual decent with decent 2-way activity.

 

GLOBAL EFFECT

It is true, that the disruptions from currency movements have an effect in the economy. The question is how significant is it? In a system of 8 currencies, each currency starts from equal 12,5% in the total reserves. At random single currency wipeout this means a decrease of -5,025% of the global portfolio value.

That is because if not all currencies fall to zero at the very same pace simultaneously and at the very same time, prices in some currency pairs in the foreign exchange market will always increase. GBP did not lose anywhere near 100% of its value however. On average it lost between 15% – 25% and against certain currencies a bit more on the short term.

At the worst point of the overall cycle conservative portfolios lost 1,2%, while investment grade portfolio risk profiles lost 4% from top to bottom. That is normal in the portfolio of currencies as performed by portfolio risk management system of ioNectar.

 

INCREASED RELATIVE EARNINGS

Ever since the Brexit vote British Pound Sterling must have been one of the darlings of the foreign exchange space. GBP showed disproportionally larger earnings potential than in previous years. A lot of movement, decent liquidity and overall constructive behavior in price action never really aroused any serious doubts in GBP because of Brexit. Despite all the drawbacks and price drops, serious demand for the currency has been present mostly all of the time. In under a year from the initial Brexit vote and in 7 months after GBP flash crash, GBP as individual currency component is setting new performance highs in our ARM AI.

Relatively GBP after the 20% drop already shows additional new value as individual performance block in our ARM AI. This means that real relative value of all oscillations that followed every price drop in the Sterling is now higher than the nominal value of the price drop itself.

 

PERFORMANCE HIGHS IN A CALM MARKET

ARM AI, a technology which is applied on X8 currency, has been setting new performance highs in less than 3 months from the start of the negative GBP cycle. Overall performance has recently decisively broken to further fresh new highs. GBP is already contributing new share. At the same time other blocks also show healthy stability. Cumulative volatility of X8 currency reserve portfolio is further reduced because of these factors. Recently the overall portfolio balance came very close to global optimum and in such environment the performance curve is most smooth with great return quality.

 

X8 currency performance index and inflation adjusted chart

 

AI BEATS INFLATION

If we take 2,5% inflation rate as a benchmark, then the answer is yes. ARM AI managed to add close to an extra percent on top of inflation. Overall, the environment was far from optimum and at the same time not that bad. Results reflect this situation and prove that with larger volatility of the total market ARM AI can fight inflation rate higher than 3%.

 

INTEREST RATES STILL LOW

Returns have increased somewhat because of ample opportunities in the volatile market. Perhaps this is related to the mild rise in interest rate benchmarks. Rates are still close to zero and are residing decisively in a range above the lows of the recent past. If foreign exchange volatility is an indicator, then interest rates should not be in any hurry to move further up. Current volatility in the market does not justify substantial increase in rates without deflation effect to start impacting the money supply dynamic.

Because volatility has reduced, flow of earnings has peaked in this cycle, which means that the global currency market cannot sustain increasing interest rate environment. For this reason interest rates will most probably stay lower for longer still. This means potential upside movements in rates will probably come from other factors as there are no indicators in the world of foreign exchange currently implying substantial interest rate increases at the moment.

 

Gregor

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