The Brexit vote in June 2016 didn’t just lower the value of the Pound exchange rate, it also changed age-old patterns in the way Sterling is traded in the different time-zones that make up the 24-hour FX market.
Before Brexit, “GBP/USD used to weaken during the Asia and London morning but strengthen during the common London-NY and NY afternoon sessions,” says Deutsche Bank’s Oliver Harvey.
Deutsche Bank - one of the world's largest foreign exchange dealers - have released their latest findings into how global markets now perceive the UK currency and in which timezone it will most likely benefit or suffer.
“In the aftermath of Brexit, however, Asia and the London morning turned slightly bullish, while the combined London/NY session, representing peak liquidity, saw systematic selling of the Pound,” he continued.
It is thought that the pickup of selling during the Asian session post-Brexit was as a result of Asian traders viewing Sterling as a good ‘deal’ due to the currency’s massive devaluation following the referendum, in which GBP/USD fell from the 1.30s to lows of 1.1450.
Maybe because Asian traders were at one remove from actual events they focused more on the ‘price’ rather than the potential economic and political fallout from the event.
Things changed once again, however, following Theresa May’s October party conference speech in which she reiterated a more hard-line Brexit approach in which immigration would be tightly controlled regardless of whether that would result in ejection from the customs and trading union.
The message saw the far-East recallibrate their perception of Sterling based on future potential economic outcomes.
"Asian investors appeared to revise their view, and the Asian and London morning sessions saw selling pressure resume," said Harvey.
The pattern of selling in both sessions remained more or less the same up until the next major event, which was the May General Election.
The election’s outcome – a hung parliament – saw a renaissance in buying interest in Sterling as it was assumed that a softer-style Brexit would be delivered owing to the loss of the Conservative's majority.
According to Deutsche Bank’s researchers, these events probably caused the changes in buying and selling patterns in global FX markets because of the spikes in volume during the periods around the key events mentioned in the Brexit calendar.
Volumes traded on options exchanges suggest, "these political events have been the main driver behind activity in Sterling derivatives over the last 12 months," according to Harvey.
Options are an instrument used by traders to increase leverage and control risk. They are often used as a method of hedging against potential future volatility and high interest in the products would suggest markets see risks ahead.
Figures 5 and 6 show the 30 day moving sums for calls and puts volumes since Brexit to present. "As can be seen, these political events have been the main driver behind activity in Sterling derivatives over the last 12 months," says Harvey.
Volumes picked up sharply into last year’s well-flagged referendum and ramped up
only slightly thereafter, suggesting investors and corporates were relatively well
hedged for the surprise outcome.
"By contrast, May’s October, and to a lesser extent January speeches, appear to have caught the market by surprise. Sterling was far from strong and stable. Interestingly, volumes have been notably more muted over the election," says Harvey.
Option volumes are clearly now falling, suggesting negativity towards Sterling might be tailing off, but don't expect any substantial recovery.
"Looking ahead then, while it appears global sentiment has turned more positive on
GBP, conviction levels are low. This is consistent with IMM data. We don’t see
positioning as a major obstacle to another bout of pound weakness," says Harvey.