In drawing conclusions about what Brexit means for the AUD and NZD, a fundamental question needs to be answered.
Do we think of them as economies that are still operating standard policy, that have relatively good nominal growth and that are open for trade and welcome globalisation? Or, will these positives ultimately be outweighed by the fact that they are both small open economies dependent on global trade and finance which cannot be wholly insulated from global shocks?
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The truth probably lies somewhere in-between and while in some instances both currencies will be subject to a flight to quality, valuation remains critical. Currently, neither currency looks cheap on any metric, and as such, right now both are very vulnerable to lower global trade, weaker global growth and any deterioration in global sentiment. This however, may take some time to manifest and so in the short term both currencies will probably outperform the GBP, but not the USD or other more defensive currencies.
The scale of the near-term weakness will depend on how much this fractious global environment is likely to weigh on flows to emerging market equities - which had been rising until last week. Any sharp reversals will pressure reserve balances and weigh on the AUD and NZD. Beyond this, the reaction of both consumers and businesses domestically, and the resulting action from central banks will be key. We will also be watching the new ANZ Uncertainty Index. It highlights that global volatility is the most important driver of local uncertainty, which can dent confidence and prompt the RBA into action. Key short term events to watch include the reaction in funding markets, the CNY fix, the reaction in the JPY, and any measures of confidence globally.
Our bias remains that any consolidation should be used to reinitiate short positions, rather than signalling an all clear for risk assets and thus the AUD and NZD.