Forex Institutional Research: Commerz Bank FX Daily
Key quotes from the Commerz Bank FX report:
G10 FX Research
GBP: At least one of the assertions of the Brexit supporters turned out to be correct yesterday: even European countries outside the EU can be successful1 . However, Great Britain will first have to get to where Iceland already is. And yesterday’s events were not promising in that respect. Above all the complete lack of direction both amongst the British government and the leading politicians of the Brexit campaign on how to proceed following the Brexit caused continued uncertainty on the FX market. Even before the expected rating downgrade Sterling eased notably again yesterday and broke below Friday’s lows in GBP-USD (or the highs in EUR-GBP).
Even though the market is this morning dominated by risk-on and even Sterling has been able to appreciate a little, in the absence of new information this is likely to be temporary. Even after the sometimes lively parliamentary debate yesterday investors still do not know when the British government will officially announce its intention to leave the EU. British politicians signalled yesterday that there was no need to rush into triggering article 50 of the Lisbon Treaty, but that would extend the period of uncertainty for investors. The incumbent Prime Minister David Cameron wants to leave this step to his successor.
However, it is still unclear who David Cameron’s successor will be. Between Wednesday and Thursday noon nominations for the future party leader can be submitted. By 2nd September it will then be clear who will be the new Prime Minister. It is also still unclear what strategy Great Britain will pursue in the exit negotiations. As is often the case when it is unclear how to proceed Cameron announced that a task force of experts would be set up which is to develop proposals on the future relations between Great Britain and the rest of the EU. No doubt the FX market would have felt reassured if someone had thought about this beforehand.
At least the EU’s position is largely clear in the run-up to the EU summit that is due to start today: as the heads of government of Germany, France and Italy underlined following yesterday’s meeting there will be no negotiations ahead of the official application for exit negotiations. That leaves the ball in the British court. Investors need clarity on where Great Britain will be heading over the next two years or so. Of course we may see temporary countermoves or profit taking every so often as was the case on the Asian markets this morning. And the Bank of England’s injection of additional liquidity planned for today is also likely to calm the markets for the time being. But principally the following applies: no news is bad news for Sterling.
USD: The risk-on move seen this morning is putting pressure on the US dollar. It is likely to play a role that as a result of the Brexit outcome the financial markets have priced out a Fed rate hike in the foreseeable future. Based on our calculations the likelihood of a rate step before year-end 2017 (!) is now below 30%. This is likely to be partially driven by an increased risk premium. Regardless of the uncertainty on the global financial markets fundamental factors should not be ignored. Even though today’s consumer confidence is not going to be terribly informative in view of last week’s events our US economists expect a downward revision of US growth to an annualised 1.1% qoq. US growth is unlikely to be as dire as it may have looked as a result of the recently weak labour market data. However, the level of monetary policy scope available to the Fed will depend on how the global financial markets behave over the coming weeks and months – and above all: how long the US dollar is going to be in demand as a safe haven and to what extent it will be under appreciation pressure as a result of this. After all excessive USD strength remains a thorn in the Fed’s side.
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