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FX Carry Back Returns As Brexit Takes A Pause

Published 06/29/2016, 07:11 AM
Updated 07/09/2023, 06:31 AM

Market Drivers for June 29, 2016

  • EUR lower AUD higher
  • Abe spokesman warns response will be swift to any moves in FX
  • Nikkei 1.59% DAX 1.29%
  • Oil $48/bbl
  • Gold $1322/oz.

Europe and Asia
GBP: UK Mortgage Approvals 67K vs. 65K
GBP: Net Lending 2.8B vs. 2.3B
EUR: Economic Confidence 104.4 vs. 104.7

North America
USD: PI/PS 8:30
USD: PCE 8:30

Risk was back in the FX market today helping lift USD/JPY heading back to the 102.70 level which fueled a rally in AUD/JPY through the 76.00 figure.

With Brexit news exhausted for now as UK politicians brace for realignment in Parliament, the focus on geopolitical risk receded and the market went back to correlation trading, with currencies picking their cues from equities as both the Nikkei and DAX rose by more than 1%.

During late morning London trading, Buzzfeed published a leaked draft of the EU meeting statement on Brexit which reaffirmed many of the points already known including respect for the vote, insistence on speedy implementation and no negotiation before invocation of Article 50. We remain convinced that the Brexit threat will only become real if the UK actually goes through with the invocation of Article 50; It appears that this will not be the case for the time being.

Although markets remain wary and cognizant of the existential risk of Brexit, as long Article 50 is not invoked, further downside risk appears to be limited. Therefore, in this state of suspended animation, traders have returned to the “carry back” theme we explored in the wake of the Brexit vote.

As long as the UK remains part of the EU, risk assets will perform well and the Fed will now remain stationary until the end of 2016 at the earliest. That in turn has sparked demand for high yield assets such as the Aussie with traders seeking both yield and relative safe harbor status in a region less affected by the turmoil in Europe.

Little wonder then that both the Aussie and AUD/JPY were bid today. And if the situation remains at a standstill for the time being, both pairs have more upside with the former targeting the .7500 figure while the latter could push to 77.00 over the few days.

Meanwhile in North America the calendar brings personal income/spending and the PCE deflator. Both income and spending are expected to decline from the month prior given the slowdown in labor gains. However, an upside surprise could put some bid into the buck and push USD/JPY through the 103.00 figure as the day proceeds.

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