Liquidity & Momentum: UK General Election 8 June

The UK heads to the polls June 8, 2017.

I’ll make a confession, British politics are not my strongest suit. I’ll leave the speculation to the professionals. Instead of attempting to pick a winner, lets take a peak at how brokers are managing risk, and how you can capitalise on post election momentum in your trading.

Elections can bring volatility.

Watching how election results play out in the markets, in realtime, is great entertainment for market enthusiasts. If you sat there in amazement as Brexit unfolded, where the GBPUSD fell from 1.50 all the way to 1.19 or so, you’ll know what I mean. The same thing happened in the US after Trump was elected, and after the first round of the French Elections.

What the market is doing post election is attempting to price in a significant change in future expectations. Most days you see algo’s battling each other, taking a few ticks here and there. When significant news hits the market, like a surprise Prime Minster, you have genuine panic, fear, or elation. The “fair value” of an asset (or country) is there to be established as new.

The night of elections, as result are tallied and reported, are typically characterised by low liquidity in FX markets. Spreads can widen and you will likely see large swings in GPD pairs. Trade with caution, but if you manage your risk there is often significant opportunity.

Is there a chance of an upset?

There’s always a chance…however up until the weekend and the terrible events in London, the risk associated with this election had been low. In fact, a surprise result had not really come into my analysis as May seemed fairly comfortable in her position.

As mentioned earlier, I’m no expert on UK politics. What I will do, however, is look and see how those that manage risk are pricing it. One quick trick is to keep a close eye on your Forex/CFD broker and see if margin requirements leading into a specific event is changed. They take this action when an event has the chance to catch traders on the wrong side of that trade.

Interestingly, leverage requirements have not been changed for this election. This says a couple of things to me:

• FX brokers are not strongly concerned about liquidity issues around the election. By this, you could infer that they’re fairly comfortable in taking regular risk across their books.
• There’s a degree of asymmetry to the election, and thus a trade opportunity. Should the election go against the favourite, look to capitalise on the momentum.

As always, keep an eye on the markets for signs leading into these significant events.