Volatile Movements on FX Majors Fuelled by EU Referendum Speculations

24 June 2016

Rates & FX Market Update

Volatile Movements on FX Majors Fuelled by EU Referendum Speculations

Highlights

¨   Global Markets: Investors shrugged the firm initial jobless claims and manufacturing PMI, with the risk on sentiment overnight driven by pre-referendum polls which favoured the “Remain” camp. However, losses on USTs sustained overnight rapidly reversed in the early trading session when sentiment turned, favouring the opposing “Leave” camp. In EU, mixed PMI data remained inconsequential on EGBs overnight with core-peripheral spreads tightening amid the sanguine sentiment; we opine for the uneven recovery in EU to remain a deep concern, with ECB likely to extend its purchase programs beyond the March 2017 as the bloc continues to battle with sluggish CPI and growth. Eye the Spanish elections on 26^th June, with another stalemate likely to weigh on EUR and SPGBs. Elsewhere, BoJ’s Kiuchi voiced concerns over the diminishing marginal utility on additional QQE, citing weak BoJ policy maneuverability should market turmoil weigh further on Japan’s economic recovery; similar volatility was seen on USDJPY, where we opine for further BoJ easing over the near horizon as the appreciating JPY continues to threaten BoJ’s 2% CPI target.

¨   AxJ Markets: Singapore CPI recorded the largest decline in 30-years, delving deeper to -1.6% y-o-y (April: -0.5%) amid distortions from the S&CC schedule which was held in May this year, contrasting from its usual April schedule. Food prices remain the largest driver of CPI YTD, with a modest increase of 2.1% y-o-y, with the effects of La Nina expected to continue fueling food prices over the coming months. USDSGD remained muted yesterday as incremental expectations for MAS easing limited gains from risk on sentiment; maintain mildly bearish on SGD over the medium term. Meanwhile, AxJ currencies remain vulnerable to shifts in the global sentiment, with eyes remain fixated on the CNY as it continues to test its 6.60/USD support.

¨   Volatility on the GBPUSD pair climbed to its 6-year high, hitting an intraday high of 1.50 before trading lower at the 1.40 handle, driven by increasing speculations of a slight margin favouring the “Leave” camp. With the last count of results expected to arrive at 1pm local time (barring recounts), expect volatile movements to persist, as market participants brace for the results; maintain neutral stance on GBP.