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FX update - The GBP plummets as Brexit fears dictate

Written by Ian Dobbs on February 23rd, 2016.      0 comments

Market Overview:
Both the GBP and EUR have suffered in trade this week after the conclusion of last week’s UK/EU summit on the subject of a British exit from the European Union. Prime Minister Cameron called for a U.K. referendum on the 23rd of June this year at the weekend. He did so having negotiated reforms that he believed should sway British voters to vote to remain within the EU. The risk of Britain leaving the EU has seen the GBP fall to its lowest levels since March 2009 in trade overnight. The fears of such a move rose sharply yesterday after Cameron party member and London Mayor Boris Johnson said that he would campaign for the UK to leave the European Union. Voters remain evenly split on the issue and fears of an exit look set to weigh on the GBP over coming months.

The AUD has had a strong start so far this week having moved higher in overnight trade on the back of a lift in risk sentiment and rising energy prices. This has seen the broad CRB index rise close to 2%. The recent lift in iron ore prices also continued overnight as prices gained ~6%. The strong start to the week by international equities (China’s Shanghai Composite +2.35%, Japan’s Nikkei +0.9%) has helped improve the sentiment displayed towards riskier currencies. The strong link between rising oil prices and rising equities was again notable in overnight trade. The improving market sentiment has helped the AUD overcome any fallout from the data out of Australia last week, data which included weak January employment numbers and a rising unemployment rate. The economic release schedule is quiet in Australia this week, construction and wage data on Wednesday will be of some interest, CAPEX data on Thursday is also noted.

New Zealand
The NZD has sprung higher in early trade this week. The move comes on the back of a surge in key commodity prices (which has bolstered the commodity currencies) and the strong offshore equity markets which have again helped to lift the tone in sentiment towards riskier currencies. This week is a particularly quiet one for local events so again it will be down to international events to set direction. The resilience of the NZ and Australian economy to the downturn in China has bolstered demand for the antipodean currencies over recent weeks, especially in light of the market’s growing awareness of the high threshold for further RBA/RBNZ rate cuts. Last week’s RBNZ inflation expectations survey which fell to 22 year lows may cause the Governor some concern however, especially since reduced inflation expectations were noted as a point of potential concern in a recent speech.

United States
The USD has lifted in trade so far this week. This has come mainly on the back of declines in the EUR and GBP which have fallen on the back of raised fears of a British exit from the EU at the coming UK referendum on the issue. The USD was mixed in trade on Friday (having earlier lifted during the week) after the release of the latest US inflation numbers. The data pointed to inflation returning to the 2% Fed target over the medium term as the price of oil stabilizes. The m/m and y/y numbers beat the market’s expectation by 1/10th of a percent (core and headline). The FOMC minutes released last week were mixed and included a split amongst many members based on the uncertain inflation outlook and increased financial market uncertainty. Markit PMI manufacturing data released overnight disappointed after the new orders, employment and output subseries data all fell. The data calendar is a busy one this week which culminates with Q4 GDP data on Friday night.

United Kingdom
The GBP has continued to fall sharply in trade this week. Market focus has centred on the fallout from last week’s EU/UK summit where PM Cameron secured reform that he believes form the basis to keep the UK as part of the wider EU. The referendum date was set for June 23rd. The GBP has already suffered further on the Brexit fears after senior members of the Cameron Conservative party (including London Mayor Boris Johnson) said they would campaign to leave the EU. Recent reports suggest up to 150 of the 330 Conservative MPs favour such an outcome. Fears over the consequences of a Brexit include the heightened uncertainty during the transition period and the ensuing damage to confidence, investment, and potential trade diversion as the trading relationships with EU countries weaken. Recent data out of the UK included a much better than expected retail sales release on Friday, mixed employment data last week and worse than expected inflation data for January. CBI industrial trend data released overnight fell again from the month prior and failed to meet the market’s expectations. Immediate focus for the GBP will be tonight’s inflation report hearings before they key Q4 GDP numbers on Thursday.

The EUR has fallen in trade this week having been pulled lower by worse than expected overnight PMI data and heightened fears over the wider EU impact of a British exit from the EU. These fears include that an exit may signal the beginning of the end for the EU project. Brexit fears have increased overnight after many key British politicians have indicated they will campaign for an exit. Recent polls indicate a roughly 50/50 split in the British public opinion for such a move. The EUR was under pressure last week after the ECB minutes revealed discussion over additional easing at the last ECB meeting in January, an issue which also received additional press from Governor Draghi during the week. Preliminary PMI data released overnight showed an easing in the euro-zone composite number which was weighed on by declines in the manufacturing and services numbers. The weaker than expected data was joined by the German composite data which eased on the back of a miss in the manufacturing numbers. The French data also missed the market’s consensus, although it was the services numbers which provided the disappointment. Of immediate interest for the EUR will be tonight’s German IFO business confidence data before inflation and consumer confidence/inflation expectations data later in the week.

The JPY remains firm in current trade this week, this despite the firming global equity markets and improving risk sentiment which has greatly reduced the amount of safe haven flow into the Yen. Recent data out of Japan has been largely soft and included the manufacturing PMI numbers yesterday which underperformed the market’s consensus. Disappointing numbers last week included misses in the core machinery, industrial production and Q4 GDP numbers. Recent comments from the BOJ Governor Kuroda have been positive on Japan and have included ones on inflation which he views as improving steadily towards the BOJ’s target. He also thinks the positive impacts of the recently implemented BOJ negative rate policy are likely to gradually broaden across the Japanese economy. The negative rate policy has been in focus over recent days after former proponents of it have come out to speak against it. It is a quiet week on the data front in Japan this week, although national inflation numbers on Friday should interest some.

The CAD has clawed back losses experienced late last week in trade so far this week. The strong CAD link with oil has again been notable in recent trade. Oil prices have lifted ~2% in trade so far this week. This comes after being helped higher on the back of reports out of the IEA which said the oil market will gradually rebalance by 2017, a view predicated on the expectation of a 800k reduction in U.S. shale oil production in 2016/2017. Slashed exploration budgets are likely to have a major impact on the supply/demand balance in the years ahead as they impact on reserve replacement and the ability of many producers to bring in fresh supply. This issue was highlighted in ExxonMobil’s announcement overnight after they announced that new reserves had failed to replace 2015 production for the first time in 22 years. Key data out of Canada since our last report included inflation numbers which exceeded expectations and retail sales data which materially underperformed the market’s consensus. Look for pricing to again be heavily influenced by the developments in the energy market’s this week, especially given the largely empty local economic calendar.
Major Announcements last week: (Tuesday only)
  • NZ Retail sales, 1.2% q/q vs. 1.4% exp.
  • NZ RBNZ Inflation expectations 1.6%.
  • UK Core inflation, 1.2% y/y vs. 1.3% exp. (Jan.)
  • German ZEW, 52.3 vs. 55.5 exp.
  • EU ZEW, 13.6 vs. 10.3 exp.
  • NZ GDT dairy index -2.8%.
  • UK ILO Unemployment rate, 5.1% vs. 5.0% exp.
  • US Industrial Production, 0.9% vs. 0.4% exp. (Jan.)
  • Australian employment, -40.6k (Jan.)
  • Australian unemployment rate, 6.0% vs. 5.8% exp. (Jan.)
  • UK Retail sales, 2.3% m/m vs. 0.8% exp. (Jan.)
  • US Core Inflation, 2.2% y/y vs. 2.1% exp. (Jan.)
  • Canadian Core inflation, 2.0% y/y vs. 1.9% exp. (Jan.)