Foreign Exchange Update

Concerns over a Brexit spillover has subsided as Brexit is increasingly being seen as an isolated UK event. However, a negative impact is still expected.  The EU's current account surplus continues to provide support for the single currency.  Key themes are rate path, further easing and their impact on the 2017 Elections in Germany and France.  The main political risk before year end is in Italy with additional downside risk if more EU countries call for referendums.


While there is still much uncertainty surrounding the ultimate impact of Brexit, data measuring economic sentiment and performance in the UK post Brexit has been negative.  This confirms concerns of a Brexit GDP drag and concerns on sources of financing for the UK's significant current account deficit.  Both of these factors should pressure the GBP.  Expectations for stimulus at the BoE's August meeting are high.


Despite the Bank of Canada's latest forecasts being less pessimistic than expected, we still continue to favor CAD weakness.  While there should be limited direct impact from the Brexit vote, concerns about near term growth should keep the BoC on hold for the rest of the year.  In the short term, CAD direction is likely to be driven by oil and USD sentiment.


The yen remains one of the currencies most positively correlated to risk aversion.  Over the last 2 months, the yen has been the most volatile G10 currency.  In the short term, yen movement seems driven by market opinion of fiscal and monetary policy, illustrated by the yen's strengthening based off disappointment with the BoJ's decision last Friday.  Beyond the short term, JPY strengthening pressures should persist through 2016 due to macro conditions.


Concerns about global growth and the possibility-currently at ~67%--of more easing should weigh on the AUD.  Recent comments from the RBA suggests that low inflation may spur a cut, so the recent softer CPI will be a point of focus at its August meeting.  A deceleration in household spending coupled with "modest", to quote the RBA, employment growth are headwinds for the AUD.


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