Forex Institutional Research: Commerz Bank FX Daily

Forex Institutional Research: Commerz Bank FX Daily

Key quotes from the Commerz Bank FX report: 

G10 FX Research

GBP: The Brexit referendum remains the dominating subject on the FX market. Several of the polls published over the weekend and yesterday showed the leave supporters in Great Britain in the lead. That creates risk-off sentiment on the FX market and is putting considerable pressure on Sterling. Even though EUR-GBP failed in its test of the 0.80 mark yesterday, nobody would be able to exclude a return to the record levels seen in early April. Against this background GBP hedges are getting increasingly expensive: By now the implied 1 month volatility even exceeds the levels seen during the global financial market crisis. It is unlikely that under these circumstances today’s inflation data will be of much interest. After all it will only become relevant for the Bank of England’s monetary policy again after the situation is back to normal.

USD: Today the FOMC’s two day meeting kicks off, with the result being announced tomorrow evening. But of course the FX market is fully aware of the fact that the Fed outlook also depends on the outcome of the Brexit referendum. Should we see a Brexit, a Fed rate step before the end of the year will no doubt be priced out. The market expects a period of increased uncertainty and under these circumstances the Fed would be unlikely to hike rates. That means the fall of rate hike expectations over the past few days should not be overestimated. To a large extent it is likely to reflect increasing Brexit concerns and should correct again should Great Britain decide to remain in the EU. At that stage Fed rate hikes would soon become centre-stage again. The number of possible rate steps this year would then depend very heavily on the data. Following the worryingly weak labour market report real economic data such as today’s retail sales must not disappoint as otherwise USD will continue to flag.

JPY: Only few things improve as a result of endless repetition. The comments by the Japanese Finance Minister Taro Aso on exchange rate moves are most definitely not amongst these. Yes, “stable exchange rates are desirable”. We have all heard this repeatedly. Neither that nor Aso’s comments that officials will keep an eye on the FX market “to prevent speculative moves from lasting” have caused fears of the Japanese Ministry of Finance intervening against the strong JPY on the FX market this morning. USD-JPY is carefully easing its way towards this year’s low at 105.50. For the time being Japanese FX market interventions are not an issue as Aso himself has been saying that if necessary action would be taken in line with G7 and G20 agreements. The fact that JPY is in demand as a safe haven in the current market environment and appreciates as a result does not in itself constitute a disorderly market move which would cause the G7 partners to agree to FX market interventions. No major central bank is interested in excessive volatility on the financial markets. I would not exclude that should push come to shove coordinated action on the FX market would be acceptable – but not until we face this excessive volatility.

CHF: Of course for the Swiss National Bank (SNB) FX market interventions have long since been an issue. The SNB has long since been concerned about the Swiss franc being in demand in connection with the Brexit referendum. However, the sight deposits published yesterday do not suggest that the SNB intervened against CHF strength last week. That fits in well with the notable downtrend in EUR-CHF: EUR-CHF lost more than 2% last week and has reached the lowest levels since early April. Whether intended or not, the SNB is sending out a clear message to the market: it does not want to assume the full risk and will not tolerate (at least partially) downtrends in EUR-CHF.

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