As tomorrow’s UK referendum approaches (beginning 8pm NZ time) market liquidity is drying up and providing excuses for investors to sit on their hands and await the binary outcome.
A couple more polls were released overnight showing “Remain” and “Leave” neck-and-neck. Betting odds still favour a “Remain” vote, but Oddsmaker reduced the chance from 80% to 75%. It feels like the market is priced more in line with the betting odds, with a modest relief rally likely to ensue on “Remain” and a serious downward market correction for risk assets on a “Leave” vote.
Currency movements over the past 24 hours have been fairly modest. The USD is down about 0.3%, perhaps a lagged reaction to Fed Chair Yellen’s subtle change in tone yesterday, where she qualified her optimism on the economic outlook.
The IMF cut its US growth forecast this year from 2.4% to 2.2%, leaving next year’s forecast of 2.5% unchanged. It also commented that the “…the path for policy rates should accept some modest, temporary overshooting of the Fed’s inflation goal”.
GBP has also been soft, after those two polls confirmed that the referendum vote remained too close to call. After reaching as high as 1.4774, it has lost a cent, trading flat against the USD.
The NZD marched on higher, reaching a fresh one-year high of 0.7189 early this morning before selling pressure on the USD eased, and this saw it come back down to 0.7170. The currency is likely to blast through the 0.72 handle on a “Remain” vote, but we expect a circa 5 cent fall on “Leave”.
The AUD followed a similar path to the NZD, up through the 0.75 handle and back down a little. NZD/AUD remains in a tight trading range ahead of the vote and sits at 0.9560.
Any customers with currency requirements should be looking to transact sooner rather than later. A number of banks and liquidity providers have indicated that they will be turning off electronic trading systems as the referendum gets underway. Some money-transfer services have said that they will stop any GBP transfers until the results are released. Stop loss and take profit orders will not necessarily be acted upon as liquidity dries up further and bid-ask spreads will widen. The debacle following the Swiss abandonment of its currency peg to the euro eighteen months ago is still fresh in the memories of currency traders and banks, illustrating what can happen to liquidity and price action following a major shock.
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