- Murky Brexit outlook to delay FDI flows and hurt sterling
- UK rate cut on July 14 or August 4 looks inevitable
- RBA a non-event, risk appetite and commodities govern AUD
The high end of the London property market will be hit by post-Brexit indecision. Photo: iStock
By John J Hardy
The Brexit vote aftermath continues to dominate the market’s attention, even as the fallout has been uneven and has largely lifted in places – particularly in general global risk appetite and the riskiest currencies, as these corners of the market celebrate the real and anticipated liquidity implications.
But for Britain at least the lack of clarity on where this all leads us will continue to delay investment decisions in the UK, with ugly implications in particular for the London property market – most of which is driven by foreign capital. Given that the UK’s current account deficit was running at a clip of nearly 7% of GDP over the last few months, anything that slows capital inflows undermines the currency.
Bank of England chief Mark Carney has been out promising endless liquidity and today the BoE issues its semi-annual financial stability report with another Carney appearance. A rate cut looks inevitable at either the July 14 or August 4 BoE meeting. GBP continues to trade very heavily and it’s hard to imagine that we can sustain this sideways action for much longer, with the lack of a firmer bounce pointing to fresh sterling weakness.
The Reserve Bank of Australia meeting overnight arrived amid tepid expectations but also after rather aggressive recent strength in AUD, as all risk- and commodity related currencies have surged in the wake of the Brexit vote on the liquidity implications of the shock. The RBA was hawkish in shrugging off Brexit contagion worries and noting the continued rise in housing prices, but there was little more to go on and it was also clear that the RBA will watch the next CPI print with interest for policy implications and that recent currency strength is “complicate” Australia’s post-mining boom adjustment.
The Australian elections and political uncertainty on the formation of a new government seem to be playing a very minimal role in the proceedings at the moment, though lack of decisiveness on reducing the budget deficit on a wobbly future government could wear on Australia’s AAA rating, as the S&P ratings agency already pointed out. We understand the argument that AUD can sustain a robust rally from here on central bank liquidity as far as the eye can see and as the RBA is restrained from cutting rates by the continued boom in the housing market, but we’re not yet convinced.
While Brexit fallout will smoulder for a very long time to come, the next key US data points lie just ahead, starting with tomorrow’s June ISM non-manufacturing survey and followed by the critical employment report on Friday after it was the May report that sent the USD into a tailspin. Strong US data will likely be felt most strongly in USD strength versus safe havens (JPY, CHF, EUR).
Relative to the magnitude of the post-Brexit vote selloff, the consolidation has been quite modest and suggests that sellers are fast to arrive at the scene on any notable upticks. A fresh move towards 1.3000 or lower could be in the wings as the amplitude of rally attempts has eased here and now that we’ve had more than a week to assess the situation.
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The G10 rundown
USD – US data is the next key, USD bears need tepid US data and strong risk appetite to continue to thrive – eventually looks like a tough combination.
EUR – Italian banking woes not seeing contagion into sovereign spreads as the ECB has managed to keep peripheral spreads contained in the wake of the Brexit vote, though one has to wonder about the safe haven credibility of the euro when European banks are clearly under pressure.
JPY – The yen powering stronger again and one can only wonder where the JPY crosses eventually trade if risk appetite rolls over again. The lowest post-Brexit intraday low (on the day after the initial shock) was 101.41. It’s a waiting game for the next BoJ move, though fiscal policy driven by the Abe government has the bigger potential to change the rules.
GBP – Sterling on the ropes as GBPUSD pushes toward the post-Brexit vote lows this morning – plenty of room for lower levels from here, starting with round numbers like 1.3000, 1.2750, etc.
CHF – Safe haven status theoretically still in play, but recent action suggests little conviction in this trade. More interesting could be potential franc weakness if we get notably stronger US data through Friday’s employment report.
AUD – the rally was checked by the RBA overnight even as the guidance was very mild from the central bank statement. AUD is likely to trade in sympathy with broad risk sentiment and commodities, with silver and copper recently in the spotlight and having some potential to move AUD.
CAD – we’ve neutralised the Brexit vote shock, but that doesn’t mean CAD momentum looks very impressive – still watching for follow up rally potential and a fresh break of 1.3000+ to point higher.
NZD – little to differentiate NZD and AUD, as the next critical steps for both are the Q2 CPI prints – with New Zealand reporting 10 days before Australia on the 17th.
SEK – Riksbank tomorrow and some risk of dovishness on concerns over what this means for European growth, with Sweden’s economy leveraged to exports. This could be the driver of SEK underperformance.
NOK – outperforming its Scandinavian peer with NOKSEK pulling to new 2016 highs as commodity prices have remained relatively supported.
Upcoming Economic Calendar Highlights (all times GMT)
- Eurozone Jun. Final Markit Services PMI (0800)
- UK Jun. Services PMI (0830)
- Eurozone May Retail Sales (0900)
- Norway June House Prices (0900)
- UK BoE’s Carney to publish financial stability report (0930)
- UK BoE’s Carney press conference (1000)
- Eurozone ECB’s Mersch to Speak (1205)
- US Factory Orders (1400)
- US Fed’s Dudley to Speak (1830)
– Edited by Clare MacCarthy
John J Hardy is head of FX strategy at Saxo Bank