A global bonds selloff has pushed yields up across the board towards post-Brexit highs while the anti-establishment wave sweeping the western world could force a 'No' vote on the Italian referendum in December.
Article / 22 June 2016 at 8:13 GMT

FX Update: It’s the final countdown

Head of FX Strategy / Saxo Bank
  • Market transfixed by referendum, Yellen virtually ignored
  • The market still expects Bremain to prevail
  • A Brexit  result would deliver a very nasty shock

Let's just get it over with, it's been dragging on too long. Photo: iStock

By John J Hardy

The long wait is nearly over, and the degree to which the UK referendum has the market in its thrall was readily apparent yesterday, as Fed chair Yellen’s semi-annual testimony before a Senate Panel hardly garnered any notice. Some portion of the lack of interest is clearly on the Fed’s rapidly eroding credibility and guidance missteps that have the market increasingly wanting to ignore what the Fed says and concentrating instead on incoming data. 

The quote of the week goes to Yellen yesterday saying that the Fed is “not relying much on forward guidance.” Nor is the market at this point, chair Yellen. Still, while Yellen mostly waxed optimistic on the prospects for the US economy, but she kept the worry level on China quite high, offered up a boilerplate Brexit concern, and perhaps most interestingly, downshifted the outlook on the economy subtly, as Bloomberg noted

The prominence of the word “whether” was notable in her statement: “Proceeding cautiously in raising the federal funds rate will allow us to keep the monetary support to economic growth in place while we assess whether growth is returning to a moderate pace, whether the labor market will strengthen further, and whether inflation will continue to make progress toward our 2 percent objective.” Another sign that the Fed is unsure of the strength of the US economy. 

UK referendum results: a rough ride Friday night?

If sources like this one are correct, we can expect an election campaign style result rolling in at random intervals throughout the night in the UK in early Friday hours, with each region representing markedly different pro-Brexit and anti-Brexit leanings. For those fortunate enough to be long gamma (having bought options long ago with strike prices near the market price as they run into expiry) this can be a boon for in and out hedging. For the rest of us, we should recognise the dangers of large swings as the night progresses. Of course, if key areas known to be especially pro-Brexit or the opposite, a result significantly at odds with expectations for that reason could prove a “tell” the generates a significant brutal move as the market draws conclusions.

We also have the scenario to contend with post referendum if indeed we do see a victory for the Brexiteers, as the referendum is not legally binding and could result in virtually no practical change in the near term, and possibly a two-year negotiation process under Article 50 of the Lisbon Treaty. This could be a kind of replay of the 2005 new EU constitution referendums in France and Holland, which saw explicit popular rejection of the constitution, even if it was passed nonetheless.


The “pricing out” of the Brexit scenario is partially complete, if indeed we do see the Remain side prevailing at tomorrow’s UK referendum on EU membership. The more difficult scenario is a shock Brexit – particularly if the result is a nail-biter all through Friday night as the results are rolling in. The risk of large moves in a Brexit scenario has increased due to the market lowering the perceived risk of this scenario, making it more difficult to argue for a “sell the rumor, buy the fact” reaction pattern that one often sees into major event risks, when positioning is clearly leaning one way.

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G10 rundown

USD – The dollar might rise against the JPY and CHF in a Bremain scenario as the latter two are arguable the strongest safe havens of late, but the recent Fed dovishness could weigh on the greenback’s prospects elsewhere if global risk appetite celebrates a Bremain and sells dollars on the recent dovish tilt from the Federal Open Market Committee.

EUR – The euro should have low beta to a Bremain vote, potentially rising to the top of the range in EURUSD, but with less notable strength elsewhere, outside of EURJPY and EURCHF. A Brexit vote would more likely immediately see euro weakness within the G3 and against CHF, and euro strength elsewhere on safe haven seeking.

JPY – Bloomberg sources in Japan say that Japan’s MOF does not see unilateral intervention as an option in the event of a Brexit vote.

GBP – The Bremain scenario is quite straightforward from all appearances (another sharp bounce in sterling, reverting to the mean in EURGBP and GBPUSD), while a Brexit scenario is less so for the reasons we outline above.

CHF – The Swiss National Bank will inevitably intervene if a shock Brexit scenario comes to pass, but market pressure could overwhelm their efforts in the short term, even if it’s far from certain that we see a durable selloff.

AUD – Likely correlated with risk appetite over the UK referendum. If we see strong risk melt-up scenario in the wake of a Bremain, AUD may be well positioned to gain – watching the 0.7575/0.7600 area as a possible upside swing level.

CAD – less impressed with CAD lately and looking for USDCAD rally soon unless we have a market melt-up in risk appetite and extension in the oil rally as $50/barrel has proven quite the magnet for both Brent and WTI.

NZD – little to differentiate the kiwi from the Aussie at the moment, as market not interested in cross trading ahead of a global macro event risk.

SEK - low beta to UK referendum, with Bremain seeing EURSEK lower and Brexit seeing it challenging local resistance.

NOK – Recent bearish reversal getting a tailwind as oil rallies again and Bremain would likely provide a further tailwind short-term for NOK bulls. Assuming no guidance surprises from Norges Bank tomorrow.

Upcoming Economic Calendar Highlights (all times GMT)
  • Switzerland Jun. Credit Suisse ZEW Survey (0900) 
  • Canada Apr. Retail Sales (1230) 
  • Euro Zone Jun. Consumer Confidence (1400) 
  • US Fed’s Yellen to Testify before Congressional Committee (1400) 
  • US May Existing Home Sales (1400) 
  • Australia RBA’s Ellis to Speak on Panel (2300) 
  • Japan Bank of Japan’s Kiuchi to Speak (0130) 
  • Japan Nikkei Manufacturing PMI (0200) 

– Edited by Clare MacCarthy


John J Hardy is head of FX strategy at Saxo Bank


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