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  • An A-Z Guide On Brexit: How To Profit From The Most Dramatic Geopolitical Divorce.
19.09.2019

An A-Z Guide On Brexit: How To Profit From The Most Dramatic Geopolitical Divorce.

Brexit remains a #1 geopolitical topic for over 3 years now. It had so many plot twists that its chronicles almost look like a TV show… although no one can drop watching it.

Let’s find out how it all began, where it’s going, and how to use it for your advantage in trading.

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BREXIT OVERVIEW

What’s Brexit?

Brexit is an acronym for British exit - the initiative of the United Kingdom to leave the European Union. The country joined the EU back in 1973 and decided to leave in June 2016 after a public vote (referendum).

Why does the UK want to leave?

The “Leave” scenario supporters name several reasons, such as the immigration problem, excessive bureaucracy, EU tariffs, etc. However, the main sentiment is

“Decisions about the UK should be taken in the UK”

 This is what 52% of people voted for back in the 2016 referendum. And so it began.

Brexit Deal

To make the divorce painless for both parties, the UK and the EU are expected to agree on a deal, which is a set of terms for the withdrawal process covering a number of topics:

  • the rights of EU citizens in the UK and British citizens in the EU
  • how much money the UK is to pay the EU (the divorce bill)
  • the backstop for the Irish border

What went wrong?

Brexit was planned to happen in November 2018 but was postponed multiple times because of several problems - primarily because of the backstop issue.

A border between Northern Ireland (a part of the United Kingdom) and the Republic of Ireland (a free state) will be the only land border between the UK and the EU. Currently, there are no border posts or checks on people or goods crossing the border. Its status is crucial for post-Brexit trading.

  • The EU proposed the ‘backstop’ - a legal guarantee to avoid a ‘hard border’ in case of a no-deal Brexit. It means special status for Northern Ireland.
  • The UK doesn’t like this idea because a different status for Northern Ireland could threaten the existence of the United Kingdom.

Since the Irish problem is a part of the withdrawal agreement, it’s one of the things that keeps blocking Brexit.

No-deal Brexit

No-deal means the UK would immediately leave with no agreement whatsoever. New PM Boris Johnson is committed to leaving the EU on October 31 - deal or no-deal. His opponents claim that a no-deal Brexit would hurt the country too much so that the entire idea isn’t worth the efforts. This is what it will happen right after a no-deal Brexit:

  • Leaving the Single Market and customs union
  • Leaving EU institutions such as the European Court of Justice and Europol
  • Ending the UK memberships in various EU bodies
  • Stopping contributions to the EU budget - about £9 bln a year

THE IMPACT OF BREXIT ON GLOBAL TRADE

This is what will come through the most dramatic changes in case of Brexit.

  • UK trading partners

Countries that have deep trade ties to the UK are the most vulnerable - especially Ireland, Belgium, the Netherlands, Cyprus, and Germany.

  • Industries

Sectors that may experience the biggest export impacts are motor vehicles and parts, electronic equipment, and processed foods.

  • Services sector

London is a global financial center - the services industry constitutes almost 80% of the total UK economy. Most of all, experts worry about the insurance and financial services.

  • Trade costs

In the most likely scenarios – either a free trade agreement (FTA) or a fallback to WTO rules – the costs of trade between the UK and the EU will increase.

  • Transfer and logistics

After the UK leaves the EU, the UK would no longer belong to EU fiscal legislation, which can mean double taxation for the companies transporting products and services across the UK and the EU.

  • Supply chains

The UK is a big deal in the international supply chains, especially in sectors like financial services, mining and chemical products, transport, telecom, and wholesale and retail industries.

  • Global trade flows

As a member of the EU, the UK has dozens of free trade agreements with 58 non-EU countries. All these agreements will have to be renegotiated again. 

In general, the most striking economic effect of Brexit will be the reduction of bilateral trade between the UK and the EU. This would lead to reductions in GDP and in real income because the higher costs of trade would result in a less efficient resources flow across industries.

TRADING ON BREXIT

Since the UK is the first country to withdraw from the EU, it might be hard for the Forex traders to interpret the events right and make good predictions. However, we’ve learned some lessons so far:   

  • No-deal scenario:

If the UK reveres to the rules of the WTO, it will have a teething period till 2020, which will be a period of great uncertainty. This uncertainty will cause the fluctuation of the GBP, which would make it an unreliable base currency for any pairing.

Trade transaction costs will increase with new tariffs on exporters. Businesses that depend on EU-based raw materials, and consumers will have to bear margin cuts. This will have significant repercussions on the global stock and forex markets.

As for the stocks, the UK-based companies abroad may outperform, while the domestic companies’ shares may go down. If the UK-EU trade would become too expensive, people will start a massive stock sell-out.

  • Deal scenario

The GDP will eventually start strengthening, but the initial blow to the rate of the GBP is unavoidable. The worst part is nobody can tell how long the recovery period will take, and what new challenges it would bring along.

Thus, the main word to describe your trading opportunities with Brexit is UNCERTAINTY

Is it a good thing or a bad thing?

For people of the United Kingdom and the European Union - not really. For traders, it’s most likely a good thing - high volatility is always a chance for a trader.

UK stocks, GBP/USD and gold all likely to experience the most significant moves.

To cut the losses and play safe, follow these simple instructions, and get Brexit-ready:

  • Follow our news and analytics on Brexit
  • Set price change alerts to notify you of significant movements
  • Use Stop losses EVERY TIME
  • Stay alerted and be ready to make a move anytime

Let’s see where it’s going and be the winners - deal or no-deal!

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