Underperformance of GBP reflects some Brexit risks, but BoE also sees significant implications for asset prices; burst of volatility in AUD following unemployment data

By Kymberly Martin

The AUD and NZD were at the opposite ends of the performance spectrum over the past 24-hours. The AUD has been the strongest performer, while the NZD was amongst the weakest.

The release of the Australian employment report was yesterday’s local highlight. The AUD experienced a burst of volatility after the report, before a steadier uptrend took hold overnight. The AUD/USD now trades around 0.7710.

The NZD/AUD appeared to bear the brunt of improved sentiment toward the AUD. The NZD/AUD gapped lower on the release of the report and has limped lower ever since. The cross found support at the 0.8900 level in the early hours of this morning. We see further downside to the cross as the year progresses, assisted by our expectation for NZ-AU 2-year swap spreads to trade into negative territory (see Interest Rates).

As a result of selling on the cross, the NZD/USD also came under pressure yesterday afternoon. The NZD/USD dipped to lows below 0.6830 last evening before recovering to 0.6870 currently.

Overnight, the Bank of England voted 9-0 to keeps its policy rate unchanged at 0.5%, as expected.

When making its decision the BoE explicitly considered the implications of the UK voting to leave the European Union. It said a ‘Brexit’ would result in an extended period of uncertainty that would likely weigh on demand in the short-term. It could also have significant implications for asset prices, particularly sterling.

The underperformance of the GBP year-to-date likely already reflects some ‘Brexit’ risk, though further downside would likely ensue. The GBP/USD has consolidated in the early hours of this morning around the 1.4160 level.

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Kymberly Martin is on the BNZ Research team. All its research is available here.