UK has voted to leave the EU - ING

Research Team at ING, notes that the GBP has fallen sharply now that it has become clear that the UK has voted to leave the EU.

Key Quotes

“Cable is off a staggering 10%, having fallen through the 1.3500 low-point witnessed during the financial crisis in 2008/09. There has been no sign of BoE intervention so far, perhaps because there is a risk that the BoE cuts rates 25 or 50bp this morning. For the BoE it’s all about adding liquidity and it will point to another 6m GBP LTRO next week and will also offer USD and EUR liquidity should it be necessary.

In our Brexit preview analysis over previous months, we had warned that EUR/GBP could rise to 0.90 and Cable drop to 1.20 in the event of Brexit. The speed at which the market progresses to these levels is probably now a function of: a) follow-through selling from the international community as they digest the enormity of today’s decision and b) the political morass. For example does PM Cameron (and Fin Min Osborne) resign immediately or promise to oversee the launch of Article 50 (EU departure)? An early resignation and a potential Conservative leadership vacuum would add to the uncertainty and expedite GBP losses. And Scottish independence will now return to Westminster politics again.

Certainly we would not look for GBP to find a base anytime soon and would only see BoE intervention as providing FX liquidity to the market and not defending any particular level.

The stand-out performer overnight has been the JPY. USD/JPY has traded below 100. There has been no confirmation of any FX intervention by the BoJ – and certainly we would see unilateral intervention as unlikely. Instead BoJ’s Kuroda has discussed the co-ordinated use of swaps to provide liquidity. These swap lines were put in place after the financial crisis and given the move in basis swaps overnight, it’s probably USD funding where the concerns would initially lie.

Given that S&P futures are called 5% lower, and European equities even more, we would expect the safe haven JPY to remain in demand for the foreseeable future. We had pencilled in a USD/JPY target at 95 in 3Q16, largely on the back of US election risk premia, but this target may now be hit on the back of Brexit.”