BoE outlines risks facing UK post Brexit vote, GBP crumbles; commodities and commodity currencies under pressure; small negative dairy auction result

By Kymberly Martin

The JPY was the only currency to outperform a stronger USD overnight. The GBP again took out the position of worst performing currency whilst “commodity-linked” currencies also suffered.

A “risk off” environment prevailed overnight. The Bank of England published its financial stability report that highlighted post ‘Bexit’ risks and more specifically risks facing the UK current account and commercial real estate. A third, large UK real estate fund has suspended redemptions. They have insufficient cash to immediately repay investors. This could prompt the start of a downward spiral if they are forced to sell underlying property assets.

The BoE said “a sudden shift in the supply of foreign capital and in the current account deficit would be associated with a sharp increase in risk premia and adjustment in sterling.” That adjustment continued overnight with the GBP/USD falling to 1.3000, its lowest level since late-1985.

Global commodity prices were also under pressure. The CRB global commodity index declined 2.4%, led by oil. Combined with the general softening in risk appetite, this provided the backdrop for declines in “commodity-linked” currencies, including the AUD and NZD.

Yesterday, the RBA appeared to be largely dismissive of the impact of ‘Brexit’ on the Australian economy.  However, the important final paragraph of its statement was more dovish than our NAB colleagues expected, concluding with; “over the period ahead, further information should allow the Board to refine its assessment of the outlook for growth and inflation and to make any adjustment to the stance of policy that may be appropriate”.

Data delivery remains important. A Q2 core CPI result below 0.4% q/q would likely be necessary for an August rate cut in NAB’s view, given the outlook remains for reasonable growth with house prices rising. The AUD/USD experienced a short bout of volatility following the statement, but was ultimately unchanged. Overnight, the AUD/USD slipped from 0.7520, to 0.7460, as global influences took their toll.

The NZD/USD was also on a fairly steady downward path from the late evening. The small negative result on the GDT dairy auction in the early hours of this morning allowed the declining trend to continue unabated. The NZD/USD trades at 0.7140 currently.

The most notable moves on the crosses have been against the JPY and GBP. As the GBP has crumbled further the NZD/GBP has pushed up to 0.5480. The 2013 highs around 0.5650 now appear to be in sight. Meanwhile the NZD/JPY slipped from above 74.00, to 72.50 overnight, as the JPY benefitted from ‘safe haven’ flows.

There is little scheduled on the local calendar today, so expect global risk sentiment to remain the dominant driver.  Tonight’s release of US Fed Minutes will likely hold only limited relevance given the meeting took place prior to the UK Referendum.

Get our daily currency email by signing up here:

BNZ Markets research is available here.