A classic risk-on rally has ensued from the weekend polling showing a decisive shift in support for the UK remaining in the EU.
The tragic murder of MP Jo Cox, a pro-EU campaigner, has been the swing factor in turning around support in the polls.
The sell-off in risk assets seen over the past couple of weeks is currently being unwound. Europe’s Stoxx 600 index surged by 3.6% overnight while the S&P500 index is currently up 1%.
Betting odds according to Oddschecker show an 80% chance of “Remain” winning the vote in Thursday’s referendum, up from a low of 61% late last week.
GBP heads the leaderboard, showing a 2.3% gain since Friday’s NY close, breaking through 1.47 early this morning. The cumulative gain since Thursday’s low is now approaching 5%.
Commodity currencies have outperformed in this risk-on environment.
NZD blasted through the 0.71 mark yesterday afternoon and has tracked largely sideways since then, currently at 0.7110, after reaching a high of 0.7131 early this morning.
While much of the rally we expected post the referendum assuming the status quo has now already occurred, there’s a chance for a further relief rally up to 0.72.
That said, our short-term fair value model suggests that the NZD is becoming stretched, with the valuation gap approaching 10%, the highest it has been all year.
The model has under-predicted the NZD by an average 5% all year and taking into account this bias, the 0.68 handle at present would be a much fairer price in our view.
The AUD has more or less been glued to the hip of the NZD over the last week or so. NZD/AUD trades at around 0.9540 this morning.
The USD has maintained a soft under-belly in the aftermath of last week’s FOMC meeting. The USD major currency index is down another 0.5%. EUR/USD has shown a modest 0.3% increase to 1.1310.
USD/JPY is trading sub 104 this morning. According to “Mr Yen”, or Eisuke Sakakibara, the yen will strengthen past 100 per dollar this year, whichever way the UK votes in this week’s referendum – the only difference is how fast it gets there.
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