Turning Black Swans White – Dynamic Corporate FX Hedging Strategies
To forecasters who thought they correctly predicted the results of the Brexit referendum,the famous economist John Galbraith had some wise words: "There are two kinds of forecasters: those who don't know,and those who don't know they don't know."
In the morning of 24 June,it became clear that nearly 52% of the British public had voted to leave the European Union. The result,which was almost unimaginable to the rest of the world,delivered short-term seismic gyrations to the financial markets.
Initially,higher risk assets saw precipitous falls. Credit indices gapped out 10-25%,the pound sterling tumbled 12% against the US dollar,while the South African rand slumped by as much as 13% against the US dollar at one point. A flight to safe-haven assets also saw reserve currency government bond yields re-establish all-time lows,with a notable underperformance from peripheral European yields. The market,however,did not get truly disorderly nor did it witness the Armageddon predicted by financial analysts once the UK voted against expectations to leave the EU. In fact,most emerging market currencies such as the South African rand,Brazilian real and Indian rupee have all rebounded while the FTSE 100 index has recovered to a one-year high following the vote.
Financial markets recognized that the true economic implications of Brexit would only be felt in a matter of years,not days. They also realized that asset price implications were far from clear in the immediate aftermath and would be driven by factors as yet unknown,including the reaction of regulators and central banks to these perceived economic impacts.