UK Votes to leave EU

June 24, 2016

FX News Today

UK Votes to leave EU: GBPUSD down 8% now, but has traded as low as 132.30 levels last seen in 1985. GBPJPY down over 11%.. these are the magnitude of record-breaking sterling losses — although a good way off its lows — that are greeting London interbank participants as they take to their desks. The UK opted for Brexit and the only thing that will be certain now is uncertainty. Will PM Cameron invoke article 50 of the Lisbon Treaty, which will trigger a minimum two-year negotiation of exit terms? Will he resign? Will there be a general election (less than 200 of the 650 members of parliament supported Brexit)? What happens to investment, consumer spending etc during this “transition” period? How long before the ratings agencies chop the UK’s triple A status? What implications with this have on the broader European Project?

Brexiters will celebrate their victory, but the near- to-medium term economic future is not looking bright for the UK. Risk-off positioning is likely to dominate for the foreseeable. UK likely to lose its AAA S&P credit rating, according to Moritz Kraemer, chief ratings officer for S&P. The AAA rating is “untenable under the circumstances.” The U.K. government will be given 24 hour notice before any decision is announced.В  Gold rallied north of $1350, before settling around $1320.

European Outlook:В Asian stock markets tanked, U.S. and U.K stock futures are also heading south, as the U.K. votes to leave the EU. After celebrating the “Remain” lead in the recent polls yesterday, today’s reality of a Brexit vote will see Bund and Gilt futures rocketing and Bund yields are likely to fall back into negative territory, as the vote will most likely send the U.K. into recession and Eurozone growth will also be much lower than currently predicted. Eurozone spreads will almost certainly widen sharply, as the Brexit vote will revive Eurozone breakup speculation and the result feeds protest parties and anti-EU, but also anti-EMU forces across Europe. Today’s calendar has the German Ifo survey, but after the vote this will already be outdated before it has been released.

Japan Finance Minister Aso reportedly said “no comment”В on whether or not the MoF ordered intervention to stem yen gains earlier. USD-JPY had fallen to 2-plus year lows of 99.00 before magically sprinting back to 102.00 in a heartbeat. Aso also said firm action on the yen will be taken if needed (hint, hint), though said it was premature to discuss joint intervention. He said that Japan will respond to FX moves, if needed, “more than ever” and is watching with a “sense of urgency.” The BoJ presser said it will continue to closely monitor the markets after the referendum, ready to provide sufficient liquidity, “including using existing swap agreements.” USD-JPY is currently trading near 100.80 after its 106.81-99.08 swing.

Main Macro Events Today

EUR Ifo SurveyВ Expected at little change, but the Brexit vote has already outdated it before its released.

US Durable Goods В A decline to -0.5% is expected from 3.4% last time, again the Brexit vote will be the main drivers overriding other fundamental news today.

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