As a function of the UK’s “Leave” decision at the June 23 Brexit referendum, our economists have materially downgraded their expectations for the UK and European economies vis-à-vis the rest of the world. In the same context, we are making material revisions to our FX forecast set.
Having been wrong about the outcome of the referendum, we are lowering our 3m GBPUSD forecast to 1.22 from levels 1.58 previously. This is consistent with the “leave” outcomes we expected when we previewed the possibility back in January. Nonetheless our trade portfolio gained on the week, given our long held short GBP hedge established when still cheap.
We are lowering our 3m EURUSD forecast to 1.05 from 1.17 previously. Our former forecast had anticipated a general jump in European currencies which were all pricing in some degree of Brexit contagion risk premium. Now the bad outcome is realised, we suspect the market will be consistently looking to sell EURUSD rallies.
We are not risk averse across the board – we see this as mostly a European problem. As such we add the following trade recommendations to our portfolio.
1. We recommend buying a 30 Aug 2016 EURBRL put spread, strikes at 3.7300 and 3.5600 for net 2.1% of face value (spot ref: 3.6540). The maximum net gain is around 2.7% if spot finishes at or below our lower strike at expiry. The maximum loss is limited to the net premium paid.
2. We recommend buying a 29 Aug 2016 expiry EURRUB put spread, strikes at 72.30 and 68.80, for net 2.2% of face value (spot ref: 70.98). The maximum net gain is 2.8% if spot finishes at or below our lower strike at expiry. The maximum loss is limited to the net premium paid.