FXTM Analysis: FXTM June Major Assets Roundup

Pushed to the cliff’s edge over the last six months of speculation and negative sentiment, the GBPUSD finally toppled off the verge on June 24th, the day after the Brexit vote was confirmed.

Plunging to levels last seen in 1985 during the ensuing panic sell-off, the GBPUSD fell to the level of 1.3234 from a high of 1.4974 earlier in the month.
 
Although the UK is not in the Eurozone, the implications of the wider European Union economic bloc without the UK partnership has also impacted heavily on the Euro.

The EURUSD fell from a high of1.135 mid-month to a low of 1.099 after the vote, while the GBPEUR dived steeply from a high of 1.3132 to a low of 1.1991. UK travellers are expected to find their Sterling cash worth much less across most major exchange rates, at the very least for the short-term.

The Gold price soared amid the uncertainty, taking off from $1260/ounce on June 23rd to over $1330 by June 24th. Investors stayed true to form during the market crisis, and rushed to buy up the safe-haven asset, while selling off the ones with higher risks.

Black gold – WTI Crude Oil – was also caught up in the sell-off, dropping to a low of $47/barrel from a high of $52 in the immediate aftermath of the Brexit shock.

The storm’s epicentre may have been the UK, but it spread fast and furiously across the world markets. Emerging market currencies suffered short-term wave crests in the storm before stabilising.

The USDIDR bucked from 13,333 to 13,550, throwing off the calming reins placed by Bank Indonesia’s new measures, namely an interest rate benchmark of 5.5 percent.

Due to the risk aversion in the markets and sudden loss of risk appetite following the unexpected shock from the EU referendum result, all of the emerging market currencies declined with this including the Indonesian Rupiah.

The reason was not too due to Brexit outcome having a direct impact on the local economy, but because reduced risk appetite encourages investors to be less attracted towards the emerging markets.

The local currency has since then regained losses, however it is possible that global economic uncertainty will linger for some time following this vote and this would mean there could be risk aversion in the markets at a later date.

The news of a possible tax cut is going to dominate the news locally within Indonesia, with the advantage to such an initiative being that the government is clearly trying to ease disposably income in the hope of higher domestic spending.

Of course and like the regular easing from the Bank Indonesia, these initiatives are targeted to improve domestic spending and GDP growth at a time where the economy is slowing down due to external risks.

The Ringgit blinked in shock as well. The USDMYR jumped from 3.9500 to 4.0900 in the immediate aftermath of the Brexit.

The volatility smoothed out somewhat thanks to Malaysian Prime Minister NajibRazak’s timely statement. The PM said that he did not expect that the Brexit would have a significant impact on the Malaysian economy, and that fiscal reforms would continue to be furthered.

The Malaysian Ringgit has been on a wild rollercoaster as of late, suffering steep losses as a result of the EU referendum shock to then regain all momentum around one week after the outcome. The EU referendum outcome is going to lead to a period of uncertainty in the markets that is likely to fuel risk aversion at a later stage, which in turn could negatively impact the Malaysian Ringgit.

It is still very difficult to pinpoint which direction the local currency is heading in next, and it should be remembered that the Federal Reserve have still not publically commented on how this could impact US interest rate policy.

The bright side to this is that if the Fed do postpone any possibility of future rate rises, then it might pull investors back towards the emerging markets where there is the benefit of higher interest rates.

The USDCNY was jolted from 6.5800 to 6.6900. It was to be expected that China’s currency could face challenges in the wake of the Brexit, but on the other hand, there is also speculation that China’s stock markets and larger business centres could gain some business if it starts flowing out of London.

The UK’s capital is expected to lose some power as a worldwide business and financial centre, mainly because of the gigantic tangle of legal and trading uncertainties presented by the Brexit.

The CNY is continuing to play down the expectations,as we believed it would do as the second half of the year approached.

The period of uncertainty now in the markets, following the EU referendum shock is going to plague risk appetite, which will be negative for the emerging markets and no EM is alone in withstanding this threat.

There are concerns in the short term that the China economy could be negatively impacted by the UK leaving the European Union, mainly because it is clear that the two governments have formed very close ties over the past two years and any loss of UK stability could impact the UK economy and its ability to maximize China relations.

The bright spot is however that the UK is now going to be forced to diversify trade relations outside of the EU, which is obviously going to present opportunities for the emerging markets because this is one area of the UK economy you would think would be reached out towards.

Obviously, if China has now developed strong relations with the UK then this could work out to their advantage at a later stage.

For the UAE’s Dirham, the main story was the GBPAED exchange rate, which fell from 5.5110 to 4.841 overnight just after the Brexit vote.

The ramifications could include cheaper exports from the UK to the UAE, but more barriers to travellers from the UK to GCC countries, given the stronger AED versus the Pound.

One possible benefit however is that the Brexit has triggered new impetus towards the idea of a free trade area between the UAE and the UK.

I think the plunge in the GBP exchange rate must be very pleasing news to any UK expatriate living in the Emirates right now. Of course, there is the positive aspect that any UAE company could now exploit and import products from the UK at a cheaper price, which might be encouraging to GDP prospects via higher imports at a time when GDP growth will be slipping lower due to depression in the price of oil.

I remain unsure how much further the GBP could fall against the AED in the medium term, not necessarily because there is any reason to be positive on the British currency, but because I don’t think the Federal Reserve are going to be in any position to begin raising US interest rates anytime soon. Any Dollar pressure is likely to lead to AED weakness, due to its peg against the USD.

Looking ahead to July, the market fallout from the Brexit vote is set to dominate, and risk appetite appears to be due for a diet of Gold and short-term profit-taking.