Pound scare
The biggest mover of the past few sessions in the foreign exchange market has been the British pound. While polls had until recently been showing an increasing double-digit lead for the “remain” campaign, there was a big turnaround as the latest polls have actually reversed and are showing either a dead heat or the “leave” camp slightly ahead. For example, it was the first time that a telephone poll indicated that the “leave” camp was ahead of “remain”, whereas “leave” was previously dominant only in online polls. According to press reports, it was the publication of a report showing the second highest inward migration into the UK last year that boosted the “leave” camp.
There are two possible conclusions from the sudden turnaround in the polls. Either it has become very difficult for polls to get an accurate picture of what is happening in the UK electorate or the situation remains a very fluid one and the outcome is still an open one. One could speculate that the only reason that sterling has not dropped even more was the worry that polls showing “remain” regaining the lead could yet be published in the coming days.
The implications of Brexit could of course extend far outside Britain’s borders. For example it is possible now that the Federal Reserve might hold off from a June rate hike in order to wait for Brexit-related turmoil to pass. Although Fed officials like Jim Bullard said that the referendum should not enter into the Fed’s considerations, it is unknown how financial markets could react to such an event.
At the very least, Britain leaving the European Union should awaken the markets to a type of risk that has been largely ignored during recent decades: that of political risk not only in emerging but also in developed markets. With the US elections in a few months’ time and the controversial candidacy of Donald Trump on the table, it will remind everyone that upsets against the consensus happen and that will probably increase demand for hedging and therefore increase the cost of insurance against negative events. Of course it should still be pointed out that the most likely scenario is that of Britain remaining in the EU. Yet it now appears risky for companies not to make contingency plans for the event of “Brexit”. This also applies to investors of course and the demand for hedging Brexit-related risks could increase. The referendum could also be an important risk event globally, with far reaching implications outside of Europe and for financial markets.
Aussie rebound hits resistance at 73 cents
One currency that has seen a recovery lately has been the Australian dollar. Versus the US dollar, the aussie has twice tested the 0.7150 area during the past week or so. The aussie had peaked above 78 cents around April 20-21 and has been dropping steadily since. The May 3 surprise decision by the Reserve Bank of Australia to cut rates by 0.25% to 1.75% certainly contributed to the aussie’s selling, as did speculation that there are more rate cuts coming.
However, there have been some data releases that have helped the aussie to recover during the past few sessions. Today’s stronger-than-expected GDP report as well as the positive contribution of net exports (that has boosted growth), was the latest such factor that helped the currency to rebound. At the same time, the aussie failed to climb above the 73 cents level as it was pushed back to 0.7230. This shows that these are volatile times for the aussie too.
Overall it looks like the downtrend for the aussie is still in place. Interestingly the pair’s current price is very near its 200-day moving average at 0.7256. The news out of China, Australia’s biggest export market, has not been particularly bad, but the slowdown there seems to be continuing and should weigh on Australian exports. The RBA also appears ready to talk down any big rallies by the aussie – particularly above the 75 cents level. At the same time, the greenback should be getting moderately stronger in line with the view of a summer rate hike by the Fed. Therefore it looks like more downside for AUD/USD.