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Whatever the outcome of the Brexit vote, expect volatility to be high in the short-term; GBP/USD jumps most in 8-years

Currencies
Whatever the outcome of the Brexit vote, expect volatility to be high in the short-term; GBP/USD jumps most in 8-years

By Ian Dobbs*:

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.

Major Announcements last week:

  • 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)

NZD/USD

The New Zealand dollar continues to remain hostage to fluctuations in global risk sentiment in trade this week. Polls from the UK which indicate a greater likelihood of Britain remaining within the EU have seen global equities and ‘risk currencies like the NZD marked higher against the USD so far this week.  Data from NZ will have no bearing on the NZD this week, so look for the Brexit news and US data to dominate. First resistance is nearby at .7150/60 beyond which we look to the broad .7230/.7275 for the next level of supply. Support is seen at last week’s lows through to .6940.

DIRECT FX Current level Support Resistance Last wk range
NZD / USD 0.7121 0.6940 0.7160 0.6964 - 0.7130

NZD/AUD (AUD/NZD)

The New Zealand dollar is little changed against the Australian dollar since our report on Friday. Rallies continue to find NZD selling interest around .9600 (buying dips to 1.0417) at present and this level continued to cap NZD demand after the firm NZ GDP data last week. Events of interest for the cross this week include the RBA minutes and a speech from RBA Assistant Governor Debelle, both are due today. We favour buying AUD over NZD at current levels, although a breach of support at .9480 (1.0549 resistance) is required to open the NZ dollar downside (AUD upside).

DIRECT FX Current level Support Resistance Last wk range
NZD / AUD 0.9527 0.9480 0.9600 0.9480 - 0.9597
AUD / NZD 1.0496 1.0417 1.0549 1.0420 - 1.0549

NZD/GBP (GBP/NZD)

The New Zealand dollar has fallen against the UK pound since our report on Friday. The move comes after the latest swing in polling on the Brexit referendum over the weekend and yesterday, which showed a marked shift in favour of the ‘remain’ campaign. Look for this issue to dominate entirely over the course of the week as the UK heads to the polls on Thursday (closing at 10pm UK time). Results will begin to filter in within 2/3 hours of polling closing and expect significant volatility throughout the day. Initial resistance lies just above .5000 (2.0000 support) whilst first support lies around the .4735 (2.1119 resistance) level.

DIRECT FX Current level Support Resistance Last wk range
NZD / GBP 0.4857 0.4735 0.5010 0.4834 - 0.5000
GBP / NZD 2.0588 1.9960 2.1119 2.0000 - 2.0685

 NZD/CAD

The New Zealand dollar is trading at similar levels against the Canadian dollar to that reported on Friday. Both currencies have been benefactors of the positive shift in Brexit based risk sentiment (NZD on risk, CAD on oil) in recent sessions after the latest move in UK polling showed a shift in favour of the ‘remain’ vote. Expect a choppy week in the cross as liquidity dries up over the course of the week heading into Thursday’s vote. Current momentum is higher in the cross, although predicting an outcome in the immediate aftermath of Thursday’s vote is very difficult.

DIRECT FX Current level Support Resistance Last wk range
NZD / CAD 0.9108 0.8960 0.9170 0.8966 - 0.9170

NZD/EURO (EURO/NZD)

The New Zealand dollar is trading at similar levels against the Euro to our previous report. Key data out of both regions is lacking this week which will put focus squarely on Thursday’s UK referendum on EU membership. Immediate support and resistance is pegged at .6200/.6300 (1.5873/1.6129) and look for volatility to increase as the week progresses. We expect an exit vote to sustain a NZD topside push in the cross over time (and the reverse to apply), although liquidity and risk considerations add to the complicated picture, especially in the short term.

DIRECT FX Current level Support Resistance Last wk range
NZD / EUR 0.6285 0.6200 0.6330 0.6213 - 0.6298
EUR / NZD 1.5912 1.5798 1.6129 1.5879 - 1.6094

NZD/YEN

The New Zealand dollar sits at similar levels against the Japanese Yen in current trade to that reported on Friday. Positive momentum for the ‘status quo’ vote on the UK Brexit issue saw the cross jump on the open yesterday as the market embraced the riskier currencies like the NZD after the news. Data is unlikely to have any bearing on the cross this week so look to Thursday’s UK vote for direction. Expect a ‘remain’ vote to lead to NZD/JPY strength in the short term, although overall we favour being a seller of this cross once the excitement dies down.

DIRECT FX Current level Support Resistance Last wk range
NZD / YEN 73.94 72.50 74.60 72.33 - 75.01

AUD/USD

The Australian dollar has firmed against the USD since our last commentary. The move comes on the back of a lift in ‘risk’ sentiment after the most recent news on the UK polling on the EU referendum. This issue looks set to dominate again this week as the UK heads to the polls on Thursday. Australian events to note are today’s speech by RBA Assistant Governor Debelle and the RBA minutes. Resistance is pegged around last week’s highs (.7505/10) and then .7550 whilst first support below .7300 looks distant.

DIRECT FX Current level Support Resistance Last wk range
AUD / USD 0.7470 0.7290 0.7510 0.7289 - 0.7480

AUD/GBP (GBP/AUD) 

The Australian dollar has fallen markedly against the UK pound since our last report. The move comes after the GBP posted it largest gain in eight years on the back of polling which has shown a shift in favour of the ‘remain’ camp in the coming EU referendum which is set for this Thursday. Look for polling and the vote result to dominate moves in this cross almost completely this week. Second support is set at .4975 (2.0101 resistance), expect volatility to remain extreme.

DIRECT FX Current level Support Resistance Last wk range
AUD / GBP 0.5095 0.5040 0.5250 0.5070 - 0.5252
GBP / AUD 1.9627 1.9048 1.9841 1.9039 - 1.9725

AUD/EURO (EURO/AUD)

The Australian dollar has continued to edge higher against the Euro since our last report. Gains have continued to be capped around .6600 (1.5152) so far after the cross took a boost this week from the increased demand for risk currencies that took place after polling at the weekend which showed an increase in the ‘remain’ vote in the UK EU referendum. Look for this issue to again drive volatility this week as the UK heads to the polls on Thursday. Australian events of interest are today, they include a speech by the RBA’s Debelle and the RBA minutes. Second resistance is pegged around .6685 (1.4959 support), second support is at .6390 (1.5649 resistance).

DIRECT FX Current level Support Resistance Last wk range
AUD / EUR 0.6592 0.6500 0.6610 0.6509 - 0.6605
EUR / AUD 1.5170 1.5129 1.5385 1.5139 - 1.5363

AUD/YEN

The Australian dollar sits unchanged against the Japanese Yen since our report on Friday. Gains yesterday came on the back of ‘risk’ buying of the AUD after recent polling on the Brexit referendum showed a gain in momentum for the ‘remain’ vote. Highs have been limited to 78.15 so far and this area now forms first resistance. First support is distant around last week’s lows (75.60). Look to today’s RBA minutes for first influence, although expect the outcome of the Brexit vote to dictate the main weekly direction. We favour buying the JPY against the AUD and would use a Brexit rally to set AUD/JPY sell orders. Second resistance is set in the 78.65/85 zone and then 80.30 and 80.80 (strong).

DIRECT FX Current level Support Resistance Last wk range
AUD / YEN 77.56 75.60 78.15 75.65 - 78.73

AUD/CAD

The Australian dollar sits little changed since our last report in current trade against the Canadian dollar. Positive market sentiment based around a shift in Brexit polling towards those in favour of the UK remaining in the EU have helped both the AUD and CAD lift since Friday as the buying of ‘risk’ currencies helped the AUD and a move up in oil lifted the CAD. Look to today’s RBA minutes for first influence, although again expect Brexit based volatility to dominate. We lack a bias this week.

DIRECT FX Current level Support Resistance Last wk range
AUD / CAD 0.9555 0.9500 0.9590 0.9422 - 0.9587

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Market commentary:

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.

Australia

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.

Europe

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.

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).

Japan

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.

Canada

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.

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Source: CoinDesk

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Ian Dobbs is a currency analyst with Direct FX You can contact him here »

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3 Comments

I reckon Britain should leave the European Union . The Brits have always been a fiercely independent bunch , and the Eurzone is a likely to turn out to be a disaster zone for the long run . How can Germany and Macedonia have the same currency and interest rates , one produces everything and the other produces nothing of value at all ?

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Fiercely independent?
Lol
You forget to mention they were ruled by the French (Normans) and now by Germans (Victoria was from the house of Hanover, and Albert was a German - her full cousin, even).
You also conveniently forget they plundered their colonies to build up their own empire. That's not very independent. That's being very dependent on what you can extract from our vassel states.
.
And the EU is no longer just a trading bloc....it's a political bloc, and was forged also to create political cohesion and friendship, and to end centuries of warmongering.
.
the Uk leaving - and really, it's England, Scotland and Wales are happy to stay, will just herald the start of the crumbling and the start of war.
Or is this what you want?

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Another day another brexit poll...at least some are taking more note of the bookie odds. Some great money to be made trading GBP on USD and NZD.

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