It is amazing how Brexit fears appear to have dissipated so quickly over the past few days as equities and most Asia FX recovered to pre-Brexit levels.

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      It is amazing how Brexit fears appear to have dissipated so quickly over the past few days as equities and most Asia FX recovered to pre-Brexit levels. There are however some exceptions - EUR and GBP remained softer and price action seems to suggest that the Brexit event is a localized event for Europe. We remain cautious of EU contagion risks and believe there remain much uncertainty in UK with regards to political development and its exit strategy. To be sure comments from BoE Governor Carney (30 Jun) that additional easing is expected over the summer and that GBP may need to find a new level – do suggest that further downside is expected. We reiterate our bias to sell EUR and GBP on rallies.

       On Asia FX, we caution that market liquidity next week is expected to be poor and could amplify FX moves. Indonesia out for holidays the whole of next week, Malaysia is off from Wed – Fri, India is out of Tue, Singapore is out on Wed and US is out on Mon.  Our in-house model shows S$NEER at about 1% above the implied mid-point of 1.36 levels, with the upper bound at 1.3320 and lower bound at 1.3870. Firm support at 1.34 levels; if broken could see further downside towards 1.3320 (Jun low). 1.3160 will be a long stretch.

       Our focus for the week ahead on Australia – Federal Elections (Sat) and RBA meets (Tue); US – Jun FoMC minutes (Thu 2am SG/KL time) and Jun payrolls data ((Fri); China will release its Jun CPI, PPI data on next Sun. For the Australia elections - Opinion polls continue to suggest that it remains too close to call with coalition marginally ahead at 51% and Labor at 49%. Australia’s triple-A credit rating could be at risk if Labor is elected as they are likely to allow for bigger budget deficits over the next 4 years before returning to balance in 2020/21. On RBA meeting, we expect no move on the Tue meeting but see rising risk of another rate cut at the Aug meeting as RBA assesses the impact of Brexit on wholesale funding cost. For US payrolls, consensus expects +180k for NFP (vs. +38k prior); +0.2% m/m (unchanged from prior) for hourly earnings and 4.8% (vs. 4.7% prior) for unemployment rate. Only a stronger than expected and upward revision on NFP, coupled with upside surprise in hourly earnings could see USD bounce.

       Other key data we are watching for the week includes service/composite PMI data from China, Singapore and Europe, US durable goods orders, Australia trade, BoE Financial Stability Report, MY FX reserves on Tue; US ISM non-mfg on Wed; UK IP; BoJ Kuroda speaks, US ADP on Thu.