6 May 2016
UK: Brexit concerns evident again - MUFG
Derek Halpenny, European Head of GMR at MUFG, notes that one currency pair that is in fact more in line with its implied yield spread level is GBP/USD.
Key Quotes
“However, the latest flow of economic data from the UK does point to the potential for short-term yields declining further in the UK. The obvious opportunity for that might come when the BOE releases its quarterly inflation report on 12th May at the same time as the monetary policy decision and the minutes from the meeting. Is there a chance of a dissent in favour of monetary easing? It’s no longer unthinkable – that’s for sure.
The latest data pointing to weakening growth was the Markit/CIPS Services PMI which fell from 53.7 to 52.3 in April. That resulted in the Composite PMI falling to 51.9 – the lowest level in over three years. The index is down from 56.2 in January which certainly points to ‘Brexit’ uncertainty playing a role in worsening business sentiment. The bias of risk is clear as we advance toward the BOE meeting/minutes/QIR on 12th May and we certainly see very little upside for GBP/USD at current levels.
The opinion polls showed that April was a very good month for the ‘Remain’ campaign but the gap that was apparent then has disappeared with ‘Remain’ and ‘Leave’ back at 50-50. The potential for yields to fall further in the UK, the large current account deficit and ‘Brexit’ uncertainty all point to downside risks for GBP/USD from here. Perhaps only (weak) US data and the Fed can help keep GBP/USD more stable. But even that influence may well fade as we move toward 23rd June.”
Key Quotes
“However, the latest flow of economic data from the UK does point to the potential for short-term yields declining further in the UK. The obvious opportunity for that might come when the BOE releases its quarterly inflation report on 12th May at the same time as the monetary policy decision and the minutes from the meeting. Is there a chance of a dissent in favour of monetary easing? It’s no longer unthinkable – that’s for sure.
The latest data pointing to weakening growth was the Markit/CIPS Services PMI which fell from 53.7 to 52.3 in April. That resulted in the Composite PMI falling to 51.9 – the lowest level in over three years. The index is down from 56.2 in January which certainly points to ‘Brexit’ uncertainty playing a role in worsening business sentiment. The bias of risk is clear as we advance toward the BOE meeting/minutes/QIR on 12th May and we certainly see very little upside for GBP/USD at current levels.
The opinion polls showed that April was a very good month for the ‘Remain’ campaign but the gap that was apparent then has disappeared with ‘Remain’ and ‘Leave’ back at 50-50. The potential for yields to fall further in the UK, the large current account deficit and ‘Brexit’ uncertainty all point to downside risks for GBP/USD from here. Perhaps only (weak) US data and the Fed can help keep GBP/USD more stable. But even that influence may well fade as we move toward 23rd June.”