Further Brexit damage for AUD, NZD?

29 June 2016, 14:28
Sherif Hasan

The big Brexit decision certainly has ramifications on markets even on lands far far away. Will we see rate cuts in Australia and New Zealand? Here are opinions from Barclays and ANZ:

Here is their view, courtesy of eFXnews:

Post-Brexit: We Now Expect The RBA To Cut Rates In August – Barclays

We had expected RBA to stay on hold for the remainder of 2016, with real GDP growth likely to remain strong and labour market conditions improving, albeit at a more moderate pace. We had highlighted that this was a very close call, given underlying inflation is likely to undershoot the central bank’s inflation target for a considerable period of time. With the UK voting to leave the EU at the referendum, our revised global growth forecasts highlight a negative impact most notably in UK and Europe, but also look for global growth repercussions to be felt in many countries, including China and the US.

In light of these developments, we have revised lower our Australia GDP forecasts by 10bp, to 3.1%, in H2 16 and 20bp, to 3.4%, in 2017. We have also lowered our inflation forecasts to 1.6% from 1.7%  in H2 16, and to 2.3% from 2.5% in 2017. We believe that the RBA will also be worried that increased financial market volatility raises uncertainty, as well as downside risks, to the economic outlook.

Therefore, we now think the RBA is likely to cut the cash rate by 25bp, to 1.50%, at its August meeting, while keeping the policy rate on hold afterwards for the foreseeable future.Meanwhile, we acknowledge that the RBA could cut the cash rate earlier than our forecast, although we think the central bank will prefer to thoroughly assess the consequence of the EU referendum before taking any action, while the sharp adjustment in AUD also will allow some relief to the economy.

AUD, NZD: What’s On The Cards Post-Brexit? How To Position? – ANZ

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?

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.

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