Political uncertainty in Australia, AUD could come under pressure; Brexit vote has implications for Fed and US economy; EU should give UK quick and fair exit deal

By Kymberly Martin

The AUD and NZD were joined by the JPY as the strongest performers on Friday. The beleaguered GBP was again the worst performer.

The GBP/USD traded down to end the week below 1.3270, though above its immediate post-referendum lows of 1.3120. Fed’s Mester speaking in London said that risks and uncertainty have increased after the June 23 Brexit vote. He noted that one mechanism in which it could impact the U.S. economy is through USD appreciation, which could dampen U.S. export growth and delay inflation’s return to 2%.

Bundesbank’s Weidmann said the EU should give the UK a quick and fair exit deal. He said although the UK decision could slow growth in the Eurozone, he does not see the need for further stimulus at this stage.

Once again political uncertainty is the theme of the day as markets open this week to a, as yet, undecided outcome in Australia’s weekend election. Most commentators assess the government as having its nose slightly in front, with the main issue being whether it can achieve sufficient seats to form a majority government. However, the final outcome is unlikely to be known until Tuesday at the earliest.

The uncertainty about the result for the next few days, and potential for a hung parliament will likely see the AUD under a bit of downward pressure at the start of the week (the AUD/USD traded higher on Friday night to end the week just below 0.7500). However, history suggests that impact will likely be temporary. Medium-term AUD trends are driven more by global and commodity trends than domestic politics.

The NZD/USD was also stronger on Friday night. It traded a pretty steady upward path, to end the week just below 0.7180. The rebound in the NZD has been helped by a recovery in global risk appetite. From lows of 29% following the UK referendum, our global risk appetite index now sits at 50%. The NZ TWI ended the week at 76.70. This is 7% above the RBNZ’s projected average for the current quarter. This will provide the Bank food for thought as we approach its 11 August meeting.

Despite the improvement in risk appetite, the JPY remains in favour. The USD/JPY traded down from 103.20, to close for the week at 102.50. Friday’s Japanese CPI data simply confirmed that inflation remains well below the Bank of Japan’s target, and on a declining trend. The stronger JPY will certainly not be helping the Bank achieve its inflation objectives.

There should be reduced trading in the day ahead as the US celebrates Independence Day. The market will also be looking ahead to the key risk event of the week, Friday’s US payrolls report.

Get our daily currency email by signing up here:

BNZ Markets research is available here.