The “Brexit” Gears Have Been Set in Motion

30 March 2017

Rates & FX Market Update

The “Brexit” Gears Have Been Set in Motion

Highlights

¨   Global Markets: UK officially formalised its desire to exit the EU bloc overnight, with UK’s EU ambassador delivering a letter to EC President Donald Tusk, triggering Article 50 of the Lisbon Treaty. While the core contents of the letter contained nothing new, disagreements have begun to surface from both sides of the table, in what looks to be a tough and challenging negotiation process. Investors are likely to focus on EU’s initial response to UK’s exit request, although GBP losses sustained overnight appeared relatively mild; stay cautious towards the GBP over the near to medium term. Over in the EU, the common currency underperformed the GBP overnight, weighed down by UK’s triggering of Article 50, alongside news report that ECB officials appear unwilling to revise their dovish inclination before mid-year. While a Le Pen’s presidency is not our base case, as well as the consensus’s scenario, huge tail risks associated with it should continue to keep the EUR under pressure ahead of the French elections; we remain mildly bearish towards the EUR over the near term.

¨   AxJ Markets: BoT held the benchmark rate at 1.50% yesterday, although the bank voiced concerns over the strength of the Kingdom’s currency that could potentially derail the current economic momentum. While BoT upgraded the 2017 GDP forecast to 3.4% (previous: 3.2%), eyeing more foreign tourist arrivals this year, the bank also downgraded its 2017 inflation forecast to 1.2% (previous: 1.5%) due to lower oil price assumption. We continue to position for BoT’s status quo decision over the foreseeable future amid financial stability concerns; stay neutral THB.

¨   AUDUSD climbed 0.47% overnight to 0.7672 despite the dollar’s strength, likely on quarter-end fund flows given the recent JPY retracement, amid little fundamental catalysts. Data due this morning revealed improving New Home Sales m-o-m, while job vacancies expanded albeit at a slower pace than in January. Expect the AUD to remain sentiment-driven over the coming weeks; stay neutral AUD at current levels.

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