Carry Back Returns As Brexit Takes a Pause

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Market Drivers June 29, 2016

EUR lower AUD higher
Abe spokesman warns to response will be swift to any moves in FX
Nikkei 1.59% Dax 1.29%
Oil $48/bbl
Gold $1322/oz.

Europe and Asia:
GBP UK Mortgage Approvals 67K vs. 65K
GBP Net Lending 2.8B vs. 2.3B
EUR Economic Confidence 104.4 vs. 104.7

North America:
USD PI/PS 8:30
USD PCE 8:30

Risk was back in the FX market today helping lift USD/JPY back to 102.70 level and fuel a rally in AUD/JPY through the 76.00 figure.

With Brexit news exhausted for now as UK politicians brace for realignment in Parliament, the focus on geopolitical risk receded and market went back to correlation trading with currencies picking their cues from equities as both Nikkei and Dax rose by more than 1%.

In late morning London trading Buzzfeed picked up a leaked draft of the EU meeting statement on Brexit which reaffirmed many of the point known before including respect for the vote, insistence of speedy implementation and no negotiation before invocation of article 50. We remain convinced that the Brexit threat will only become real if UK actually goes through with the invocation of Article 50 and it appears that this will not be the case for the time being.

Although markets remain wary and cognizant of the existential risk of Brexit, as long the article 50 is not invoked further downside risk appears to be limited. Therefore in this state of suspended animation traders have returned to the “carry back” theme we’ve explored in the wake of the Brexit vote.

As long as UK remains part of the EU, risk assets will perform well as the Fed will now remain stationary until the end of 2016 at the earliest. That in turn has sparked demand for high yield assets like the Aussie with traders seeking both yield and relative safe harbor status in a region less affected by the turmoil in Europe.

Little wonder then that both Aussie and AUD/JPY were bid today and if the situation remains at a standstill for the time being both pairs have more upside with the former targeting the .7500 figure while the later could push to 77.00 over the few days.

Meanwhile in North America the calendar bring personal income/spending and the PCE deflator. Both income and spending are expected to decline from the month prior given the slowdown in labor gains. However an upside surprise could put some bid into the buck and push USD/JPY through the 103.00 figure as the day proceeds.

Boris Schlossberg
Managing Director

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