Friday’s trading was focused on the UK referendum.
The opinion polls were pointing to a “too close to call” outcome but the market chose to ignore that warning signal and was completely unprepared for the shock “leave” outcome.
As the polling booths closed at 9am NZ time, conviction levels of “Remain” winning seemed to increase and as the results began to trickle in, it just seemed like an ordinary day. As the day wore on and more results came in it became clearer that the result was going to be close and chaotic trading conditions ensued with wild swings in currencies in illiquid market conditions. Eventually, the penny dropped that a shock result was in the making.
Much of the volatility occurred during NZ trading hours, with movements more orderly after hours as European markets opened. Indeed relative to the NZ close, risk assets and GBP recovered.
As to be expected, GBP was the big swinger, trading in a range of 1.3229 to 1.5018, breaching 30-year lows at one point and closing the NY session at 1.3679, down just over 8%, its largest daily fall in the free-floating exchange rate regime.
Of the majors, other European currencies were the hardest hit, with SEK down 3.6%, EUR down 2.4%, and NOK down 2.2%. The commodity currencies NZD, AUD and CAD were down between 1.7-1-9%, while even CHF managed a 1.4% fall. Not surprising JPY topped the leaderboard, gaining 3.8% against the USD.
Expressed in NZD terms, NZD/GBP rose by 7%, closing around 0.5215 after peaking just below the 0.53 mark. NZD/EUR was up 0.9% to about 0.6420 and NZD/AUD was up 0.3% to 0.9540. On the other side of the ledger, NZD/JPY fell by 5.4% to 72.80, NZD/CNY fell by 1%, and NZD/USD close at about 0.7125, down 1.7%. On a TWI basis the currency was down about 0.6% to 76.2.
G7 central banks released statements confirming that they are monitoring developments in global financial markets, and co-operating with other central banks. The Fed reminded the market that swap lines to provide dollar liquidity to other central banks remain in place.
The Nikkei newspaper reported that Japan’s government and central bank are considering unilateral intervention to counter any abrupt gains in the yen. USD/JPY traded as low as 99.02 on Friday afternoon.
In equity markets the largest losses were seen in European markets, with key indices in Italy and Spain down over 12%, Germany’s Dax down 6.8%, France’s CAC40 down 8%. The UK’s FTSE100 was down over 3%, supported by the weak GBP and the dominance of global-focused companies, while the S&P500 was down 3.6%. By sector, financial stocks were the hardest hit and other economically-sensitive sectors underperformed.
Considering the increase in risk appetite on the assumption of “Remain” in the lead-up to the referendum, by the end of the trading session much of the movement in equity markets and the NZD seemed fairly constrained. Indeed, the weekly falls for the S&P500 and Europe’s Stoxx 600 index were “only” 1.2% and 1.6% respectively, while NZD/USD was actually up 1.1% for the week. .
It’s too early to judge that the worst is over – indeed it probably isn’t over. The political turmoil in the UK that has developed over the weekend and the months of uncertainty ahead suggest that a period of subdued risk appetite is likely to develop over coming weeks, which suggests more downside potential for risk assets and the NZD.
The restrained downward movement of NZD/USD on Friday likely reflected the changed bias for US monetary policy, with the risk of an easing now being priced in. Our stress-testing for a 5 cent fall in NZD assumed a VIX reaching 50, but it closed the day just above the 25 mark.
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