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FX Update : UK EU referendum week arrives, GBP/USD jumps most in 8 years

Written by Ian Dobbs on June 21st, 2016.      0 comments

Expect an extremely volatile week of trade in international currency markets across many of the key currencies as liquidity moves to a premium in the lead-up to Thursday’s UK vote on EU membership. Already this week’s move up in the GBP/USD exchange rate was the largest in eight years and comes after news at the weekend (and yesterday) which showed a large shift in favour of the “status quo” camp. Bookmakers have now reduced the odds of an exit to around 25% and point to the sizeable undecided vote which should favour the ‘status quo’ on voting day. Whatever the outcome, volatility will be high and the response in the financial markets in the short term at least, exaggerated.

Last week was a relatively quiet one in Australia after the major economic release to feature printed largely in line with expectations. The May employment report saw unemployment remain unchanged at 5.7%, although disappointingly all of the (17.9k) gains in jobs were of a part-time nature. Labour market underutilization (unemployment and underemployment) rose to over 14%, a number that looks likely to maintain pressure on wages growth. Data on business conditions remained solid in May, whilst consumer sentiment slipped but maintained most of its rate cut related bounce from May. Data this week in Australia is light and is dominated by the news that will be released today which includes the minutes of the last RBA board meeting, data on house prices and a speech from the RBA Assistant Governor Guy Debelle (who also speaks on Thursday). Look for the UK vote on EU membership and polling on the issue to dominate flow throughout the week.

New Zealand
An improvement for the ‘remain’ camp in the UK EU referendum polling over the weekend and yesterday has led to a relief rally in global equities and the embracing of risk in initial trade this week. Thursday’s vote will dominate flow in the currency markets this week and initial results are expected early on Friday afternoon (NZ time). Local news last week was dominated by strong GDP data for the first quarter which saw growth accelerating towards 3% on an annualized basis. The current account for the same period improved markedly from the period prior on the back of strong tourism and falling imports and helps demonstrate the growing resilience that the NZ economy will have to external shocks. The latest GDT auction was unable to improve on the gains from a fortnight earlier and disappointingly the whole milk powder (WMP) price fell 4.5%. Data of interest locally is lacking this week (migration and credit card spending on Wednesday), so look for a UK and US leads throughout the week.

United States
The USD has opened lower in trade this week on the back of selling seen against key currencies like the EUR and GBP. This comes as the markets reacted to the latest polls in the UK which showed a gain in momentum for the ‘remain’ camp in the UK’s EU membership referendum. Comments from Fed rates ‘hawk’ Bullard saw him reverse his earlier stance on the need to tighten monetary policy in the near term, as he took public ownership of being the outlying very low ‘dot’ in the Fed’s June ‘dot plot’ from last week. The FOMC meeting saw a change in expectations from many Fed members on rates as additional members pointed to the likelihood of just one rate rise this year. Data releases included retail sales which exceeded expectations and industrial/manufacturing production numbers which failed to meet expectations. The NY Fed empire manufacturing index rallied from the period prior, whilst the latest inflation data printed slightly lower than the consensus at the headline level. US May housing starts were marginally stronger than expectations, although April’s numbers were revised down. Building permits data issued for the same month marginally underperformed against expectations. US events this week start with a speech from Fed Chair Yellen today (and again on Wednesday) and conclude with durable goods and Michigan consumer sentiment on Friday.

United Kingdom
News in the UK which continues to be dominated by the UK EU referendum issue has bolstered support for the GBP this week after it posted its largest rally in eight years on the back of three opinion polls which showed the ‘remain’ camp pulling back into the lead. This as speculation remains high that the killing of MP Jo Cox could result in a shift in public opinion against the leave campaign. The polling shift has seen global equities rally sharply this week as the ‘risk on’ sentiment swelled in response to the polling news (FTSE +3%). Data which last week took a back seat to polling included numbers on inflation which failed to meet expectations and labour market indicators which showed a continuation in the trend of falling unemployment. Retail sales for May jumped sharply from the month prior and easily beat consensus forecasts. The BoE meeting on rates failed to provide any real inspiration as the board unanimously voted to leave rates on hold at 0.5%. Expect news on the results of the EU vote to begin within 2/3 hours after polling closes at 10pm Thursday (UK time).

The tiring issue of the UK referendum on EU membership has once again dictated trade in the EUR since our last report. Gains in the polls by those in favour of the UK remaining within the EU have helped bolster global risk sentiment since Friday. This has seen the EUR, like its UK counterpart, marked higher in the interim. Data out of Europe last week was minimal but included numbers on industrial production which beat expectations and euro-zone trade which fell from a month earlier. Euro zone inflation for May was slightly higher than the consensus, whilst the latest quarterly numbers on wages and labour costs showed a rise from Q4 2015. Look for the Brexit vote on Thursday to dominate this week (results Friday). European data of interest starts with ZEW economic sentiment indicators today and concludes with the German IFO on Friday. Various regional PMI indicators are set to feature between the aforementioned releases.

The economic calendar in Japan last week was dominated by the latest central bank monetary policy meeting. Stubbornly soft domestic inflation proved insufficient to stoke additional policy accommodation from the BOJ this time around. The bank looked to retain the option of further easing for post the UK EU referendum should it be required. The move has led to further Yen strength in recent sessions (much to the ire of senior policy makers) and interestingly the Yen remains in solid demand this week despite an improvement in global risk sentiment- which might normally be associated with a reduction in demand for the safe haven Yen. Other data released last week included industrial production numbers which slightly exceeded the consensus and capacity utilization data which fell sharply from the month prior. Trade data yesterday showed imports again slumping (in line with expectations) and exports falling to all major regions, including Japan’s largest trading partner China. Other data events are few this week although preliminary manufacturing PMI numbers for June will feature on Thursday.

Last week was again a quiet one in Canada for incoming market moving data. The key release was the May inflation report on Friday which came in marginally under expectations on a headline basis. The core numbers maintained their recent levels however as inflation ran at 2.1% on an annualized basis, whilst the earlier release of the manufacturing shipments data was seen rising sharply from the month prior. Oil news has again been the dominant driving force which has seen the CAD rally this week and late last week as the price of oil moved higher once again, this time on the improving polling for the status quo on the UK EU membership issue. Sentiment on oil also managed to overlook data from oilfield services provider Baker Hughes which showed the number of rigs drilling for oil in the US increasing for the third week in a row (although current numbers stand at only 20% of their peak). Look for this week in Canada to be dominated by Brexit/oil pricing and expect Canadian retail sales numbers on Wednesday to be quickly overlooked.

Economic Events (Tuesdays only)
  • Australia NAB Business Confidence, 10 vs. 9 prior (May)
  • Japan INdustrial Production, 0.5% m/m vs. 0.4% exp. (Apr.)
  • UK Inflation, 0.2% m/m vs. 0.3% exp. (May)
  • EU Industrial Production, 1.1% m/m vs. 0.8% exp. (Apr.)
  • US Retail Sales, 0.5% m/m vs. 0.3% exp. (May)
  • NZ Q1 Current Account, 1.31B q/q vs. 1.05B exp.
  • UK Claimant Count, -0.4k vs. -01.k exp. (May)
  • UK Unemployment rate, 5.0% vs. 5.1% exp. (Apr.)
  • US FOMC Interest rate, 0.50% as exp.
  • NZ GDT Dairy Index, 0.0% vs. 3.4% prior.
  • US NY Fed Manufacturing Index, 6.01 vs. -4 exp. (Jun.)
  • NZ Q1 GDP, 0.7% q/q vs. 0.5% exp.
  • Australia Employment change, 17.9k vs. 15.0k (May)
  • UK BoE Interest Rate, 0.5% as exp.
  • US Inflation, 0.2% m/m vs. 0.3% exp. (May)