Week Ahead: Brexit: This Is Not A Drill - FX Markets Drivers & Views
26 June 2016, 11:08
0
77
The Brexit camp won the EU referendum triggering a violent risk off reaction. There should be three key drivers of FX price action from here.
Copy signals, Trade and Earn $ on Forex4you - https://www.share4you.com/en/?affid=0fd9105
The first is a continuation of the GBP underperformance on the back of the initial selloff following portfolio outflows and earnings repatriation. While the outcome of the EU referendum is not legally binding, we expect the government to officially start the procedure of withdrawal from the EU. All this could push GBP another 7% lower from current levels in the near term and lower still over the longer-term.
The second FX markets driver should be the political contagion from the referendum that will continue to weigh on the European currencies. In particular, fears about intensification of the centrifugal forces inside the union could weigh on Scandies, EUR and CHF. The outlook for EUR in particular will reflect the impact of two seemingly conflicting drivers – the support from portfolio and earnings repatriations and the concerns that growing political uncertainty will dampen the outlook for the Eurozone and trigger further ECB easing. We expect EUR to underperform USD and JPY.
The third FX market driver is global risk aversion, on the back of lingering uncertainty about the impact of mounting political risks on global business activity. While concerted central bank action to provide liquidity and one-sided FX interventions by the likes of the BoJ and the SNB may contain some of the selloff, we suspect that investors will remain in risk-averse mode for the time being. This should continue to weigh on the G10 commodity currencies AUD, NZD and CAD and support safe currencies like JPY, CHF and USD.
Next week’s data releases may have less of an impact on the markets. We suspect that the risk of further intensification in risk off should remain in place especially if data out of Japan and China disappoint. At the same time, US data should point at growing core inflation and highlight the limits of the Fed’s current accommodative stance. All that should leave smaller G10 currencies, European or not, rather vulnerable and keep liquid majors supported. Importantly, the prospect for FX intervention could limit the JPY and CHF especially against USD.
