G10 FX Weekly
Group Economics Macro & Financial Markets Research
25 February 2016
GBP slumps on Brexit fears Georgette Boele Co-ordinator FX & Precious Metals Strategy Tel: +31 20 629 7789 georgette.boele@nl.abnamro.com
Roy Teo
• GBP slumps on Brexit fears… • …we expect further weakness up until the referendum • JPY strength persists – over to you Aso • We expect no coordinated response from G20 • RBA to keep OCR unchanged; rate cut in May likely
Senior FX Strategist Tel: +65 6597 8616
GBP slumps on Brexit fears
roy.teo@sg.abnamro.com
Since Prime Minister Cameron agreed a deal with EU and announced 23 June as the referendum date, sterling has fallen sharply. Although, financial market already widely anticipated that the referendum would be held in June, by officially setting the date Brexit risks have come more into focus. In addition, news on Sunday that London Mayor and Conservative political heavy weight Boris Johnson will campaign for UK exit from the EU was seen as increasing chances of a Brexit. Since then, sterling has been under heavy pressure. GBP/USD has dropped below 1.40 and EUR/GBP has surpassed 0.79. Although a Brexit is not our base scenario, we have been negative on sterling versus the US dollar since November 2015 because of a delay in BoE rate hikes, a weaker economy and fears about Brexit ahead of the referendum. As such our short sterling versus US dollar high conviction view has been our top-performing trade this year. We expect GBP/USD to move towards 1.35 ahead of the referendum. We expect the upside in EUR/GBP to be limited though because of more aggressive monetary policy stimulus by the ECB.
GBP weakness versus US dollar level
2.10 1.90 1.70 1.50 1.30 00
02
04
06
08
10
12
14
16
Source: Bloomberg
Insights.abnamro.nl/en
2
G10 FX Weekly - GBP slumps on Brexit fears - 25 February 2016
JPY strength persists – over to you Aso In the past week, the Japanese yen (JPY) strength has persisted as global growth concerns remain and geopolitical risks between South and North Korea continued. However, there are also other dynamics. First, the yen has failed to move lower on days that investor sentiment is rather positive. Second, expectations about the yen have been revised upwards with some analysts no longer expecting weakness in the yen going forward. The yen retested the 111 level against the US dollar on 24 February as officials from Japan Finance Ministry refrained from verbal interventions. In our view, conditions for currency intervention are in place as the yen has appreciated by 17% against currencies of its main trading partners since June 2015. Speculative flows into the yen and volatility in the currency are also extreme. We maintain our view that Finance Minister Aso is likely to take action and intervene in the currency market if the current one sided JPY strength persists. In addition, a stepping up of BoJ’s monetary easing should also weigh on the yen.
G20 meeting – seeking understanding and empathy The G20 finance ministers and central bank governors will convene in Shanghai on 26-27 February. They are likely to address issues like the sharp correction in financial markets and global economic risks as well as what should be done to support growth. The probability of a major coordinated response from G20 members is low. The People’s Bank of China may reassure the G20 that it is not seeking to devalue the yuan and changes in the exchange rate regime since August last year was to let the yuan be more reflective of China’s economic fundamentals and more market determined. Japan Finance Minister Aso is likely lobby to clear the way for intervention in currency markets if deemed necessary. Overall, the G20 may repeat that competitive devaluation of currencies is not desirable.
RBA to keep OCR unchanged; rate cut in May likely The Reserve Bank of Australia (RBA) is widely expected to leave monetary policy unchanged on 1 March. We expect the RBA to signal that downside risks to Australia’s major trading partners’ growth outlook have increased. We maintain our view that with subdued inflationary pressures and soft labour market, there is scope for the RBA to cut the Official Cash Rate (OCR) by 25bp to 1.75% in May. We expect the Australian dollar (AUD) to decline towards 0.65 by the end of this year.
3
G10 FX Weekly - GBP slumps on Brexit fears - 25 February 2016
ABN AMRO major currency forecasts Changes in red/bold EUR/USD USD/JPY EUR/JPY GBP/USD EUR/GBP USD/CHF EUR/CHF AUD/USD NZD/USD USD/CAD EUR/SEK EUR/NOK EUR/DKK
25-Feb 1.1029 112.14 123.63 1.3927 0.7907 0.9912 1.0918 0.7173 0.6660 1.3699 9.3453 9.5576 7.4622
Q1 2016 1.10 116 128 1.45 0.76 1.00 1.10 0.70 0.65 1.40 9.50 9.60 7.46
Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 1.05 1.05 1.05 1.05 1.05 1.05 1.05 117 118 120 122 124 122 120 123 124 126 128 130 128 126 1.36 1.35 1.38 1.40 1.42 1.44 1.46 0.77 0.78 0.76 0.75 0.74 0.73 0.72 1.05 1.05 1.05 1.06 1.07 1.08 1.09 1.10 1.10 1.10 1.11 1.12 1.13 1.14 0.68 0.66 0.65 0.63 0.62 0.64 0.65 0.63 0.62 0.61 0.60 0.58 0.60 0.62 1.40 1.38 1.36 1.38 1.40 1.42 1.44 9.50 9.50 9.50 9.25 9.00 8.75 8.50 9.20 9.00 9.00 8.75 8.50 8.25 8.00 7.46 7.46 7.46 7.46 7.46 7.46 7.46
Source: ABN AMRO Group Economics
4
G10 FX Weekly - GBP slumps on Brexit fears - 25 February 2016
Find out more about Group Economics at: https://insights.abnamro.nl/en/
DISCLAIMER ABN AMRO Bank Gustav Mahlerlaan 10 (visiting address) P.O. Box 283 1000 EA Amsterdam The Netherlands This document has been prepared by ABN AMRO. It is solely intended to provide financial and general information on economics.The information in this document is strictly proprietary and is being supplied to you solely for your information. It may not (in whole or in part) be reproduced, distributed or passed to a third party or used for any other purposes than stated above. This document is informative in nature and does not constitute an offer of securities to the public, nor a solicitation to make such an offer. No reliance may be placed for any purposes whatsoever on the information, opinions, forecasts and assumptions contained in the document or on its completeness, accuracy or fairness. No representation or warranty, express or implied, is given by or on behalf of ABN AMRO, or any of its directors, officers, agents, affiliates, group companies, or employees as to the accuracy or completeness of the information contained in this document and no liability is accepted for any loss, arising, directly or indirectly, from any use of such information. The views and opinions expressed herein may be subject to change at any given time and ABN AMRO is under no obligation to update the information contained in this document after the date thereof. Before investing in any product of ABN AMRO Bank N.V., you should obtain information on various financial and other risks and any possible restrictions that you and your investments activities may encounter under applicable laws and regulations. If, after reading this document, you consider investing in a product, you are advised to discuss such an investment with your relationship manageror personal advisor and check whether the relevant product 窶田onsidering the risks involved- is appropriate within your investment activities. The value of your investments may fluctuate. Past performance is no guarantee for future returns. ABN AMRO reserves the right to make amendments to this material. ﾂｩ Copyright 2016 ABN AMRO Bank N.V. and affiliated companies ("ABN AMRO").