Brexit: An Ugly Aftermath; Don’t Catch GBP Falling Knife – BofA Merrill

26 June 2016, 18:40
Sherif Hasan
0
53

After Brexit won, we had huge volatility. However, it is far from over as scrambling continues around European capitals. And also for the pound things could get ugly. Here is the view from Bank of America Merrill Lynch:

Here is their view, courtesy of eFXnews:

When the dust settles…it won’t be pretty

Once the dust of the knee-jerk market reaction settles, we think that the UK’s economy will clearly be the main victim, but also that the shock for the Euro area and the global economy is likely to be significant. Policy responses will be needed beyond the ‘first-aid’ remedy market disruption normally requires. It’s very bad for UK growth… Uncertainty on the UK’s future relationship with the EU will remain high within UK and European institutions for a long time, possibly for the entirety of the two year transition period provisioned by the European Treaty in case of exit. This will come from a combination of (i) a desire by the EU not to offer too much to the UK to avoid fuelling temptations to exit elsewhere, (ii) a difficulty for the EU member states to agree on a common approach to the UK (emigration countries such as Poland will likely focus on free circulation of labour, Ireland on practical considerations on border controls, France and Germany on financial services etc…) and (iii) the political turmoil a Brexit creates in the UK itself: several MP’s have already said they would seek to unseat the Prime Minister, but they don’t have a majority in parliament. Conversely, some Conservative MPs in favour of exit have pre-emptively called on PM Cameron to continue after the election, but the situation remains very fluid. Prolonged uncertainty could lead investors – including residential investors – to postpone decisions. We think a recession in the UK will ensue, which cuts our calendar year 2017 GDP growth forecast to 0.2% from 2.3%, even with the Bank of England (BoE) stimulating.

FX: GBP sinks GBP has fallen sharply across the board following the vote to Leave with losses concentrated versus USD, JPY and CHF. The move has been particularly strong given the recent rise in optimism that the Remain vote would prevail, thus propelling GBP higher.

Further GBP losses are likely over the near-term and a move towards 1.30 in GBP/USD cannot be ruled out. We would, however note that sharp sell-offs in GBP have historically proved short-lived. For now, this may not be the time to ‘catch a falling knife’.

Share it with friends: