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Currencies to Look Past BOE, SNB as Brexit Fears Sink Sentiment

Currencies to Look Past BOE, SNB as Brexit Fears Sink Sentiment

Ilya Spivak,

Talking Points:

  • Yen soars as status-quo BOJ rate decision unleashes risk-off capital flows
  • “Brexit” fears sink Aussie, Canadian Dollars alongside Asian stock prices
  • FX markets to look past SNB, BOE and US CPI as risk-off trade continues

The Japanese Yen moved sharply higher in overnight trade after the Bank of Japan opted not to expand monetary stimulus. The outcome was widely expected while the central bank’s policy statement struck a familiar tone, which makes the currency’s outsized reaction somewhat curious. Indeed, prices jumped nearly two percent to score their largest increase in nearly two months.

The dramatic rally may reflect pent-up demand for the anti-risk unit against a backdrop of deepening risk aversion across global financial markets. Indeed, the CVIX gauge of one-month implied FX volatility has surged to the highest level since 2011 as next week’s “Brexit” referendum nears. With that in mind, the passing of the BOJ rate decision may have simply cleared the air for capital inflows.

The sentiment-linked Australian and Canadian Dollars followed Asian stocks downward and the British Pound came under renewed selling pressure after a single session’s respite yesterday. Sterling’s slide mirrored that of Australian and Japanese equity benchmarks as well as US stock futures, underscoring the centrality of UK political risk as the source of investors’ dour mood.

The New Zealand Dollar managed to buck the trend elsewhere in the commodity FX space, with prices rising after upbeat first-quarter GDP data crossed the wires. The currency traded higher alongside front-end yields, signaling that the figures weighed against RBNZ interest rate cut speculation. Still, the priced-in probability of a 25bps cut at the central bank’s next meeting in August is relatively elevated at 54 percent.

Monetary policy announcements from the Swiss National Bank and the Bank of England headline the economic calendar in European trading hours. A pickup in Swiss inflation over recent months probably means that the SNB is unlikely to feel pressured into action. Meanwhile, the BOE will almost certainly save its ammunition for whatever is to follow next week’s referendum.

US CPI figures enter the spotlight later in the day, with the core year-on-year inflation rate expected to edge higher to 2.2 percent. The outcome may not offer much support to the US Dollar however considering its limited implications for near-term Fed monetary policy. Indeed, yesterday’s FOMC policy announcement was interpreted as broadly dovish by the markets despite an upgrade in officials’ price growth outlook.

On balance, this is likely to see sentiment trends remain at the forefront. S&P 500 futures are pointing sharply lower, hinting that the risk aversion is like to carry forward into the hours ahead. This bodes suggests that overnight FX trade dynamics are poised to continue.

Losing money trading in the FX markets? This might be why.

Asia Session

22:45NZDGDP SA (QoQ) (1Q)0.7%0.5%0.9%
22:45NZDGDP (YoY) (1Q)2.8%2.6%2.3%
01:00AUDConsumer Inflation Expectation (JUN)3.5%-3.2%
01:30AUDEmployment Change (MAY)19.9k15.0k10.6k
01:30AUDUnemployment Rate (MAY)5.7%5.7%5.7%
01:30AUDFull Time Employment Change (MAY)0.0k--9.3k
01:30AUDPart Time Employment Change (MAY)17.9k-19.1k
01:30AUDParticipation Rate (MAY)64.8%64.9%64.8%
01:30AUDNew Motor Vehicle Sales (MoM) (MAY)-1.1%--2.8%
01:30AUDNew Motor Vehicle Sales (YoY) (MAY)1.7%-2.2%
01:30AUDRBA FX Transactions Government (MAY)-916m--991m
01:30AUDRBA FX Transactions Market (MAY)909m-946m
01:30AUDRBA FX Transactions Other (MAY)25m-68m
02:45JPYBOJ Annual Rise in Monetary Base¥80t¥80t¥80t
02:45JPYBOJ Basic Balance Rate0.1%-0.1%
02:45JPYBOJ Policy Rate-0.1%-0.1%-0.1%
04:00JPYTokyo Condominium Sales (YoY) (MAY)-14.1%--13.5%

European Session

05:45CHFSECO June 2016 Economic Forecasts --Low
07:00CHFKOF Institute Summer Economic Forecast --Low
07:30CHFSNB 3-Month Libor Lower Target Range-1.25%-1.25%High
07:30CHFSNB 3-Month Libor Upper Target Range-0.25%-0.25%High
07:30CHFSNB Sight Deposit Interest Rate-0.75%-0.75%High
08:00EURECB Publishes Economic Bulletin --Low
08:30GBPRetail Sales Ex Auto Fuel (MoM) (MAY)0.3%1.5%Medium
08:30GBPRetail Sales Ex Auto Fuel (YoY) (MAY)3.8%4.2%Medium
08:30GBPRetail Sales Inc Auto Fuel (MoM) (MAY)0.2%1.3%Medium
08:30GBPRetail Sales Inc Auto Fuel (YoY) (MAY)3.9%4.3%Medium
09:00EUREuro-Zone CPI (MoM) (MAY)0.3%0.0%Medium
09:00EUREuro-Zone CPI (YoY) (MAY F) -0.1%-0.1%Medium
09:00EUREuro-Zone CPI Core (YoY) (MAY F) 0.8%0.8%Medium
09:15EURECB's Nowotny Speaks at EU Commission Panel --Low
11:00GBPBank of England Bank Rate (JUN 16)0.5%0.5%High
11:00GBPBOE Asset Purchase Target (JUN)375b375bHigh

Critical Levels

CCYSupp 3Supp 2Supp 1Pivot PointRes 1Res 2Res 3

--- Written by Ilya Spivak, Currency Strategist for

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