The market’s playbook in the post-Brexit world has been to buy equities, bonds and risk currencies as central banks would deliver more easing, creating a lower-for-longer interest rate environment.
That stance was vindicated overnight with the Bank of England delivering a ‘muscular’ easing in policy spanning a 25bps rate cut, a £50bn expansion of the existing asset purchase programme, £10bn of corporate bond purchases and a term funding scheme introduced that will provide funding for banks at interest rates close to Bank Rate.
On currencies, the Bank of England’s aggressive stance has driven GBP down 1.6% to around the 1.31 mark. Elsewhere, currencies movements have been modest, but the commodity currencies have been bid up slightly, with the AUD up 0.6% to 0.7630 and NZD up 0.3% to 0.7180.
NZD/GBP is up around 2% to 0.5480. Our post Brexit projections had NZD/GBP on a gradually rising path over the next couple of years as the UK economy heads into recession, with the prolonged period of uncertainty contributing to a lack of consumer and business spending.
We don’t see slightly lower interest rates sparking a revival in the economy – the uncertain outlook means that it’s simply not the environment for businesses to be investing. Thus downward pressure on GBP is likely to continue.
Spillover of the plunge in GBP into EUR has been well-contained and EUR/USD is down only marginally at 1.1130. USD/JPY is little changed at 101.20. Thus, much of the currency changes over the past 24 hours have been confined to GBP.
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