The fallout from the “Leave” vote continued, with falling equity markets, lower commodity prices, a tumbling GBP and a weaker NZD. Somewhat disturbingly I couldn’t get the Carpenters’ classic song “We’ve only just begun” out of my head as I was drafting this note.
European equities took another hit, with the Stoxx 600 falling by 4.1%, led by Financials, while the S&P500 is currently down 2.0%. Much of the move pre-dated S&P’s double-notch credit rating downgrade for the UK to AA just before 6am this morning.
Other news overnight included the UK Conservative Party accelerating the timetable to elect a new leader, bringing the date forward by almost a month to Sept. 2; PM Cameron rejecting a repeat referendum; and Germany’s Merkel rejecting informal talks with the UK before the EU exit is triggered.
GBP is down another 3.6% this morning and the current low has been 1.3121. Our NAB colleagues’ Brexit scenario envisaged GBP falling into the low 1.20s by year-end, so there’s no reason to believe that sterling’s adjustment is anywhere near complete yet.
The NZD and AUD have also underperformed, doing even worse than EUR. NZD broke down through 0.70 this morning, after falling steadily through the night. Remarkably the NZD is still more than 3% higher than where it began the month so we believe that the potential downside from here is still material. The AUD has fallen at the same pace as the NZD throughout the recent turbulence and trades at 0.7335, keeping the NZD/AUD cross steady around 0.9530.
Yesterday China devalued its currency by the most since August, setting its CNY reference rate 0.9% weaker against the USD. On its currency basket, the PBoC has surreptitiously engineered a circa 6% depreciation this year, counter to its policy of maintaining a stable currency.
The spill-over from a tumbling GBP into EUR has been fairly moderate over the past 24 hours. EUR/USD trades at 1.10, down around 1%.
Not surprisingly, the Yen is the strongest of the majors, but USD/JPY is only down slightly, trading around 102, with the possibility of unilateral intervention by the BoJ to prevent Yen strength overhanging the currency. Furthermore, for hedge funds, selling GBP is a more obvious trade than buying Yen.
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