Wednesday's FOMC outing showed the Powell Fed to be less model-driven than its predecessors, but the lack of any language confirming four 2018 rate hikes sent the dollar plunging lower.
Article / 29 June 2016 at 7:58 GMT

FX Update: Post-Brexit risk rally slow to impact FX

Head of FX Strategy / Saxo Bank
  • USD caught between dovish Fed, Brexit boost
  • EURUSD rally slumps after just breaching 200-day MA
  • Swiss franc safe-haven status 'has largely evaporated'

Switzerland is as idyllic as ever (for those who can afford it!), but its currency no longer 
enjoys a safe-haven status comparable to that of its Alpine enclaves. Photo: iStock 

By John J Hardy

While opinions have swirled in the headlines that the UK referendum may not end in a real Brexit, the events in Brussels have certainly taken a firm tone of finality. Resigning UK prime minister David Cameron has said that there is no way back and German chancellor Angela Merkel stated that “this is no time for wishful thinking, but rather to grasp reality."

Meanwhile, market action was inconsistent: our risk barometer of the S&P 500 future ripped higher to the first Fibonacci retracement – a remarkable 50-plus points from the lows, but of course that came after a drop of over 130 points, so we’re still in dead cat territory for now. 

Notably, the action in currencies and especially fixed income was far more muted. With stimulus noise out of Asia, European Central Bank president Mario Draghi’s call yesterday for a new way of approaching easing, and the market predicting a more accommodative Fed, there may be a rising hope that the central bank put, and in Japan’s case, the government put will soon be on their way. 

The more such hopes are realised – or more importantly, believed – the more it weighs on the USD's resurgence. The more markets return to worrying about a post-Brexit world and fretting about the diminishing returns of policy moves, the more the USD strengthens.


Market energy has faded exponentially since the shock of last Thursday, and we have our first indications of technical levels of interest post-Brexit in EURUSD as yesterday’s consolidation rally kissed the 38.2% retracement just above the obvious resistance at 1.1100 (200-day moving average and previous range low, etc.) which provides the tactical resistance. 

Above there, the last area of note come up in the 1.1200/25 zone, with a daily close above that zone requiring a complete reassessment of the Brexit reaction. Until then, the preferred direction is lower.

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Source: Saxo Bank

The G-10 rundown

USD – The preferred safe haven if the post-Brexit reaction across markets re-engages, but if the mood somehow changes, that USD would go from strength to weakness, especially versus commodity currencies. It’s important for the USD rally to pick up again soon or directional uncertainty will rapidly worsen. As well – today’s US PCE inflation data a key data point.

EUR – ECB and Europe will need to do something about the banks to prevent credit contagion and a slowing of the economy. While many tout Europe’s enormous current account surplus as a positive for the currency, that also means Europe very leveraged to global growth – especially Germany with its nearly unprecedented export intensity for an economy of its size.

JPY – May outperform the USD if this bounce in risk sentiment fades quickly and yields to new global risk asset selling – but the threat of actual intervention and an eventual stimulus measure looms off in the distance – perhaps after July 10 upper house elections.

GBP – More downside risks for now, but given the magnitude of the range expansion, consolidation moves can make entry levels difficult for bears. Yesterday’s highs just above 1.3400 in GBPUSD are the first post-Brexit guidepost.

CHF – The Swiss safe haven has largely evaporated as EURCHF plows back into the previous zone. We’ll need another bout of risk aversion to test that theory, as it’s easy for Swiss National Bank intervention to work when markets are upbeat.

AUD – AUDUSD holding its breath between downside and upside pivots. Seeing next key event risk for AUD, besides general direction in risk appetite and exposure to China/commodities, as the Q2 CPI data set for July 27 release.

CAD – CAD more consistently weak here, though oil snapback and USD drift is not comfortable for the USDCAD bulls – 1.2900 is the key local support there.

NZD – Q2 CPI data up July 17 – winter is here in the southern hemisphere, but deflation is coming and it's more important. Implications are huge for the Reserve Bank of New Zealand's forward trajectory and market may be behind the curve.

SEK – Interesting weakness here given the resurgence in risk appetite as EURSEK remains clear of the 9.380 area support/top of old range.

NOK – EURNOK's line in the sand appears to be 9.35 as the pair tries to decide if it wants to push back into a lower range or pull above the oft-tested 200-day moving average around 9.40. Risk appetite/oil prices a key factor.

Upcoming Economic Calendar Highlights (all times GMT)
  • UK May Mortgage Approvals (0830) 
  • Euro Zone Jun. Economic/Business/Industrial/Services/Consumer Confidence (0900) 
  • Germany Jun. Preliminary CPI (1200) 
  • US May Personal Income/Spending (1230) 
  • US May PCE Inflation (1230) 
  • Euro Zone ECB’s Draghi to Speak (1300) 


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