Forex Institutional Research: Citi Brexit, First Take

Forex Institutional Research: Citi Brexit First Take

Citi Brexit First Take – Immediate implications

  • Until GBP and EUR find their levels, and domestic asset markets stabilize, there will be tremendous uncertainty in all asset markets and correlations will stay at one.
  • Coordinated intervention hardly justified at these levels. Markets have been one way at times, but so has news flow. We saw GBPUSD at 1.30 as about right in the event of a Leave, EUR below 1.10, so there is no major evidence of large overshoot yet.
  • Weakness of EZ banks could be a major vulnerability and channel for any systemic implications. Point of sensitivity for central bankers. Mindset that systemic framework more sturdy, but trigger fingers poised.
  • Leave provides some cover for ECB/BoJ ease – market turmoil, higher credit/peripheral spreads and expected confidence shock. Raises probabilities on the next USD up-leg.
  • EM and commodity currencies taking it on the chin, but not much worse than European currencies. This could change if USD strength gains momentum. Saving grace is investors are already defensive with high cash levels.
  • BoE and ECB have bigger problems than FX. They will push for coordinated intervention if FX overshoots are adding risk premium to other asset markets. We’re not there yet.

Secondary points

  • Our economists do not see a referendum redo as a likely outcome. BoE emergency cut/QE is not our base case. We think they wait to assess impact on economy. Credit downgrade likely.
  • Proactive SNB response doesn’t make sense. Rather see markets stabilize, maximize effectiveness of any intervention and avoid subsidizing speculators and seekers of a safe haven
  • Geopolitical risk in central and Eastern Europe adds to economic and asset market uncertainty.
  • Scandies hit in the crossfire. Illiquidity is punishing them but they look in a good position once liquidity is being distributed more generously. Riksbank response waits until the currency is much stronger.
  • AUD and NZD a relatively detached – spillover works through the global risk and broad USD channel

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