Yields on core European bonds went for a slide yesterday as prices rose in response to the ECB's decision to leave its QE programme unchanged – for now at least. Elsewhere, the USD continues to make gains on its peers.
Article / 28 June 2016 at 10:43 GMT

Dollar rally, sterling fall after Brexit referendum may be ending

First in Business Worldwide. /

Dollar has been surging in the wake of the Brexit-vote outcome. Photo: CNBC

The dollar has surged in the wake of the UK vote to exit the European Union as investors sought assets perceived to be safe, but there might not be too much demand left from nervous buyers.

Adrian Zuercher, UBS' head of asset allocation for Asia, said the volatility may have run its course.

"At the moment, the U.S. dollar is supported by this risk off sentiment, but we also think there's a limit to that," he told CNBC's "Squawk Box."

"The next one to two weeks are definitely supportive for the U.S. dollar, but afterwards, it'll start to peter out."

The greenback has certainly rallied in the wake of Friday's release of referendum results that surprised markets by showing the UK voted to exit the EU, an outcome labelled Brexit, and the political chaos it sparked as Prime Minister David Cameron stepped down, leaving the government there essentially rudderless.

The US dollar index, which measures the greenback against a basket of currencies, touching levels as high as 96.705 on Monday, up from levels of as low as 93.019 last week before the referendum results. At 12:38 p.m. SIN/HK, the dollar index was at 96.042.

But the rally may not last much longer, Zeurcher said.

"We think at one point, risk appetite will come back. We will see more coordinated central bank action and probably more fiscal action from the governments and therefore risk appetite should rebound," he said, noting that this was why he didn't think a safe-haven play on gold offered much benefit at this stage.

Zeurcher pointed to another reason the dollar's rally may not last much longer: Post-Brexit market volatility has likely pushed back the timing of US Federal Reserve's next interest rate hike, he said.

"The Fed has basically postponed its rate hikes, we think, until December so that's a bit less support for the US dollar," Zuercher said, noting that UBS now expects just one interest rate hike this year, down from a previous expectation for two.

While sterling has plunged to touch fresh 31-year-lows against the dollar, he doesn't expect much more downside there either.

The pound was fetching $1.3305 at 12:44 p.m. SIN/HK, off a low of $1.3122 touched Monday, but still well below the year-to-date high of $1.5018 it touched in the hours before the referendum results were released.

Zuercher said the pound was already essentially touching the UBS three-month target of $1.32. Likewise, for the euro, he only saw slightly more downside, with the three-month target at $1.08.
At 12:47 p.m. SIN/HK, the euro was fetching $1.1058, although it had fallen as low as around $1.09 last week
To be sure, Zeurcher's view may be in the minority, with many analysts expecting the pound will continue to tumble, with some forecasts expecting a fall to as low as $1.10.

For one, the risks to the economy both from Brexit and a headless government will likely keep interest in U.K. assets minimal, analysts said.

"Even if the leave camp is right and the long-term consequences of Brexit will be minimal (we disagree), in the near term, investors, business and consumers hate uncertainty," Kathy Lien, managing director of foreign-exchange strategy for BK Asset Management, said in a note Monday. "It is safe to say that all three will avoid major investments over the next few months in fear that the forecasters are right about Brexit triggering recession."

That would also likely spur the Bank of England to cut interest rates, which would also weigh sterling, she said.

Other analysts pointed to other risks if investment in the UK began to dry up.

"The UK has its largest current account deficit in decades and has been receiving record capital inflows," Bilal Hafeez, a global foreign-exchange strategist at Nomura, said in a note Monday. "A pause or sudden stop in these flows will necessarily force the pound to continue to weaken to allow the current account deficit to be reduced."

He expected that the pound would fall below $1.25-$1.30 within days or weeks.


Will the Bank of England go against the clock in the race to cut interest rates? Photo: iStock.

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— Edited by Martin O'Rourke


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