June 2016

June 27, 2016 (Commerzbank AG) – The world seems different these days following the Brexit vote and after two days of a sell-off in the global markets. The GBP is at its lowest level in three decades and the safe haven currencies are back in demand. So, what’s next for the major central banks?


At her semi-annual testimony before Congress, Janet Yellen proved very cautious. While remaining optimistic mediumterm, she considers the latest weak jobs growth figure to be no more than a temporary loss of speed. However, the Fed – or at least Yellen – appears to be moving closer to viewing current low growth as a sign of “secular stagnation”. In that case, low productivity gains would be here to stay. Yellen considers the relatively low momentum of investment as a warning signal. In the first quarter, private non-residential investment was 0.5% below the previous year’s level. Therefore, she went on, the equilibrium interest rate was low by historical standards. This is behind the FOMC members’ predictions, which look for a policy rate below 1% by end- 2016 and below 2% by end-2017. Hence, only gradual rate hikes would be expected. Following the “zig” in May – when one FOMC member after another had signalled higher key interest rates – Fed communication has now returned to “zag”.


ECB president Draghi urged euro zone policy makers to support the economic recovery by implementing economic reforms. Draghi’s comments underscore the central bank’s recent message that it has probably done enough for the time being and will now wait to see how its recent policy measures unfold. While Draghi stressed that time is needed for the full pass through of the bank’s measures, at the same time he added that the ECB would act if it saw an unwarranted tightening of financial conditions. ECB Executive Board member Mersch said that he would be the last person to claim that interest rates can be reduced ever further into negative territory. He explained that the ECB wants to prevent “collateral damage for financial market players” and “panic saving”, i.e. people start to save more because they think the period of low rates will last a long time. Draghi emphasised that the judgement of the German Constitutional Court confirmed that the OMT programme is compatible with EU law and falls within the ECB’s mandate. Yves Mersch stressed that the ECB has introduced an issuer limit for the bank’s QE programme as the European Court of Justice “explicitly highlighted” that such limits are needed for the purchases to be compatible with law.

BoE (Bank of England)

With the UK electorate surprisingly voting to leave the EU, and thus wrong-footing the markets, UK asset prices have come under significant selling pressure. The GBP-USD exchange rate at one stage registered a 13% peak-to-trough decline in the space of less than eight hours. Following the plans set out ahead of the referendum and today’s statement (“take all necessary steps”), the BoE will stand ready to inject substantial amounts of liquidity into the market, which will act as the first line of defence prior to any possible rate cut. We do not anticipate at this stage that the collapse in sterling will be uppermost in the BoE’s mind – it makes little sense to stand in the way of a falling knife particularly in view of the fact that this is the most savage move on daily data back to 1971. Far more likely is that the BoE will intervene judiciously only when the time is right (i.e. when it believes it has a chance of achieving the desired effect) in order to nudge the exchange rate. With FX reserves at all-time highs, it has the means to act if desired but there will be no desire to squander them unnecessarily. With regard to rate cuts, the BoE does have this option but having failed to jack them up in 2014 when it had the chance, it is constrained in its choice of actions with Bank Rate effectively at the lower bound.

BoJ (Bank of Japan)

Since the announcement of its extremely expansionary monetary policy (“quantitative and qualitative easing”, QQE) in April 2013, the Bank of Japan has bought government bonds equivalent to around 50% of GDP. It holds roughly 36% of all outstanding Japanese government bonds (JGB) at present and – with the speed of purchases unchanged – is likely to hold around half of all JGBs by the end of 2017. Even the IMF has warned that the BoJ will have to reduce its asset purchases by the end of 2018 to ensure that the government bond market continues to work properly. Even with this aggressive approach, the BoJ has been unable to reach its fundamental goals so far. The plan to drive inflation to 2% by the end of fiscal 2017 (March next year), in particular, appears increasingly illusory. In April, the corresponding measure of inflation – i.e. excluding fresh foods – stood at -0.3%. This is partly due to the significant yen appreciation in recent months which continues to prevent any major inflation pressure from unfolding. The BoJ’s scope for counter-measures appears limited. QE is proving difficult to expand (this also applies to the ETF purchases). Hence, the only “alibi measure” left appears to be a minimal rate cut. The next BoJ meeting will take place in late July.







June 26, 2016 (Commerzbank AG) Brexit – what now?

The UK has voted to leave the EU. We discuss possible implications. Markets already reacted strongly today, but not panicky. They could recover again in the medium term, as in our view an amicable divorce with a continued British membership in the single market is the more likely scenario. We also show that the negative impact on the UK real economy will be smaller than in past crises. Nor will the EU emerge unscathed, because Brexit will encourage parties across the continent which are critical of the EU.

Outlook for the week of 26 June to 1 July 2016

  • Economic data: The ISM index for US manufacturing looks set to have slightly decreased in June, yet staying above 50. In the euro zone, the inflation rate will presumably leave negative territory on a lasting basis in June.

The UK has voted by a surprisingly wide margin to leave the EU. We discuss possible implications. Markets already reacted strongly today, but not panicky. They could recover again in the medium term, as in our view an amicable divorce with a continued British membership in the single market is the more likely scenario. We also show that the negative impact on the UK real economy will be smaller than in past crises. Nor will the
EU emerge unscathed, because Brexit will encourage parties across the continent which are critical of the EU.

Surprisingly clear victory for EU opponents

After a highly emotional campaign, the British electorate voted to leave the EU. According to the official outcome, 51.9% were for Brexit, 48.1% for Remain. Opinion polls did not give a clear picture, but the pound’s rally in recent days indicated that the expected the UK to stay in.

Strong but not panicky market response today

Because the market has been taken by surprise, sterling has already lost considerable ground. The euro and Scandinavian currencies likewise came under pressure. The typical “safe haven” currencies – Yen and Swiss Franc – strengthened. However, the FX market has not yet shifted
into panic mode. EUR-GBP is not markedly higher than it had been in April, EUR-USD is trading above the March levels. The percentage change of sterling does not yet match the scale of the Swiss Franc’s move after the SNB shock on 15 January 2015. Therefore, markets are by non means “disorderly”. Thus, they are not in a state which might bring central banks around to agree on FX interventions. Several G7 central banks are against interventions in any case, be it as a matter of principle or out of self-interest. And those which might contemplate interventions will not pull enough of a punch on their own. Equity markets reacted strongly, but – like the FX markets – not panicky. The Nikkei lost roughly 8%, US futures are currently down around 4%.

Nature of split decisive in medium term

What happens in the medium term after the inevitable market slump today will largely depend on how the UK and the EU part company. According to Article 50 of the EU Treaty, there is a period of two years for the split to be negotiated, and this period can be extended by mutual agreement. The main concern for the UK economy during these negotiations will be to retain access to the EU single market after it has left the EU. The UK could argue that non-EU countries such as Norway, Iceland and Liechtenstein are also given this access, although the UK would then have to accept the rules of the single market (including free movement of labour) and would also have to pay contributions to the EU budget. Before the referendum, the EU view was that if the UK left the EU, it could not stay in the single market, as a deterrent to possible copy-cats. However, in our view the EU still has a strong interest in a clean break:

Exports to UK important:

47% of British exports go to the rest of the EU, whereas only 7% of Continental EU exports go to the UK. The UK is thus still the EU’s number two trade partner, after the US and ahead of China (see chart 1). The EU therefore has a strong interest in avoiding duties on goods traded with the UK and keeping it in the single market. Such duties would after all seriously disrupt cross-border production chains established over
a period of decades. In addition, EU companies would have to prove that their products complied with UK standards.

Avoiding market turbulence:

If the divorce proves acrimonious, we could see upsets on the financial markets. The EU could limit the fall-out if it signalled willingness to reach an amicable agreement.

Its own image:

The EU has a major image problem. More and more voters regard it as undemocratic. If it plays the jilted bride after Brexit and refuses the UK access to the single market, it wouldn’t only be EU critics who would object to that the UK’s democratic decision has been respected. And this is something the EU really can’t afford. If signs of a clean break gradually emerge, sterling and the equity markets should recover again in the medium term.




June 23, 2016 (Allthingsforex.com) – The people of the United Kingdom have decided to leave the European Union in a vote that has rattled the global markets and has sent the pound sterling crashing to its lowest level in three decades.

With only 5 of 382 local authorities left to declare results, BBC, ITV and Sky are projecting a win for the “leave” camp. In the meantime, the UKIP leader Nigel Farage has already declared “independence day.”

At the time of this writing, the live results showed 52% voted to leave the EU, while the remain vote was at 48%. With the exception of London, every other region voted to leave.

The GBP has witnessed a real roller coaster ride today- falling from highs a little above $1.50, when the polls closed, to as low as $1.3227 when it became apparent that Brexit will become a reality.

Global markets reacted negatively to the outcome of today’s historic vote and will be likely to continue to mull over its consequences in upcoming trading sessions.

The Bank of England has been reported to be in close contact with other central banks in an effort to manage the fallout from today’s vote.

June 18, 2016 (Commerzbank AG) – The EU referendum vote is still very open but EU supporters are already sounding shrill warnings, signalling that the EU may deny the UK access to the single market after a Brexit decision. Nevertheless, we believe a tidy divorce is more likely than a messy one. After all, the EU also has an interest in avoiding an escalation. A long-term sustained sterling depreciation, beyond the inevitable weakness on the day after a Brexit decision, is only likely in the event of a messy divorce.

Further topics:

Spain: Back to square one!

On 26 June, Spanish voters will elect a new parliament, for the second time since December. According to polls the only noteworthy change compared to the December outcome will probably be that Podemos – together with a new ally – is likely to move ahead of the Socialists. This will hardly make it any easier to form a new government, implying that another round of lengthy negotiations is to be expected.

Outlook for the week of 20 to 24 June 2016

  • Economic data: Sentiment indicators for the euro zone have been moving sideways for over two years and little is likely to change in June. In the US, durable goods orders probably increased again on the back of aircraft orders.
  • Bond market: Intensifying Brexit jitters coupled with mounting scarcity fears are challenging investors, with 10y Bund yields reaching their preliminary destination at around 0%, but volatility may escalate during the second half of next week.
  • FX market: The upcoming Brexit referendum is dominating FX markets. Should it occur, this will spur market volatility. And JPY should be in high demand as a safe haven.
  • Equity market: The ongoing consolidation of the German equity market opens up opportunities for selective buying. We prefer companies with relatively low P/B ratios versus their historic average as well as stronger earnings momentum.
  • Commodity market: Risk aversion remains high and cyclical commodities should thus remain under pressure. Oil will probably hover below USD 50 per barrel but gold should continue profiting and climb to new highs for the year.



June 18, 2016 (Tempus Inc.) – Currency markets were volatile yesterday causing some traders whiplash. The greenback initially rallied after the consumer price index showed inflation pressures are building in the U.S.  However, the U.S. dollar experienced a violent sell-off midday on apparent technical trading.  The U.S. dollar has mostly ceded more ground overnight against its European counterparts.  Commodity-backed currencies are rather flat even as the price of oil has rebounded 2.0%.

This morning’s docket is unlikely to help the greenback recover overnight losses.  New home construction in the U.S. was unchanged in May.  Housing starts in May fell 0.3%, beating dour expectations of a 1.9% contraction.  Permits, a proxy for future construction, were also little changed from April.  There is no further data releases scheduled for today.


The Japanese yen also see-sawed overnight, but ultimately opened today’s trading session unchanged from yesterday’s close.  The yen is currently at a 22-month high against the U.S. dollar, causing concern for Japanese policy makers.  The yen fell over half a percent after Japanese Finance Minister Taro Aso called for a coordination from the G7 and G20  to address what he described as “disorderly” moves in foreign exchange markets.  Aso said he wants to take “firm action”, but there is no indication from the G-7 that they are open to intervention.
The yen quickly recovered those losses, likely escalating frustrations from policy makers.  The last time Japan to sold yen to cause currency weakness was 2011.


British pound volatility remains near its highest ever.  GBP/USD has traded in a wide 2.0% range over the past 24 hours as traders attempt to position themselves before next Thursday’s referendum.

The United Kingdom was rocked by the attack and then death of Parliament member Jo Cox yesterday.  Cox was stabbed and shot while meeting with her constituents.  Cox has been a part of the “Remain” camp, lobbying for the United Kingdom to stay in the European Union.  Per a witness, the assailant repeatedly shouted “put Britain first.”    She is the first British lawmaker to have been killed in office since the IRA assassinated Conservative MP Ian Gow in 1990.

In the aftermath, political campaigning has been suspended.  Despite the condolences from both sides, the Brexit vote still threatens the U.K. economy and the British pound.  Expect volatility to rise even more in the coming days.



June 11, 2016 (Commerzbank AG) – Fed – Yes, no, perhaps

Weak labour market data have messed up the carefully prepared script for the Fed’s next rate move. An interest rate rise at the meeting next week is off the table. We show however that the recovery in the US labour market is not over yet and a rate hike at the meeting in July is therefore still on the agenda.

Outlook for the week of 13 to 17 June 2016

  • Economic data: Next week will bring a deluge of US economic data releases. We expect the figures to suggest a rather moderate pace of expansion amid slightly rising inflation pressure. In the euro zone, industrial production for April should signal weaker growth in Q2.
  • Bond market: Lower yields lead in turn to yet lower yields with 10y Bund yields now flirting with 0%. Brexit jitters add a safety bid for government bonds while ECB corporate bond purchases provide some relief. At record low yields, we suggest keeping duration exposure close to home as markets may become more erratic over the coming weeks.
  • FX market: The dollar’s appreciation trend has been broken, with the weak labour market report largely dashing expectations of a Fed rate hike in summer. Whether the dollar will keep suffering will also depend on whether the market’s long-term view of Fed policy will be reversed.
  • Equity market: A DAX summer trading market is the most likely outcome in our view, with the index remaining trapped in a range between 9,000 and 10,000.
  • Commodity market: Against the backdrop of substantial supply losses, oil prices should hold above USD 50 per barrel for now, with official estimates likely to suggest that the market is already in balance far sooner than previously predicted.

June 10, 2016 (Tempus Inc.) – While the U.S. dollar was able to claw back some of its recent losses versus its European counterparts overnight, the greenback fell to fresh lows against the Japanese yen and the New Zealand dollar.  The yen rose to its strongest level in more than a month as European equities fell, boosting demand for the safe-haven.

Despite the modest rebound during the overnight session, the greenback continues to be under pressure following Friday’s poor jobs report.  Speaking on Monday, Janet Yellen did not do the dollar any favors by refraining from signaling the timing for higher rates after saying on May 27 an increase would likely be appropriate in “coming months.”

As a result, Fed funds futures indicate 58% odds that the Fed will raise rates by year-end, down from 74% probability from a week ago.  The odds of a July rate hike are now just 18%, down from 55% last Thursday.

This morning’s light economic docket showed that first-time jobless claims unexpectedly fell last week and continuing claims tumbled to an almost 16-year low, showing decent signs for the labor market.  There are also no Fed speakers today or next week ahead of the Fed’s interest rate decision next Wednesday.

The New Zealand dollar was the best performing currency overnight, rallying as much as 1.5% against the U.S. dollar before shedding some of those gains.  Nevertheless, the kiwi is now trading at a one-year high against the U.S. dollar.  The Kiwi’s strength comes after the Reserve Bank of New Zealand kept its key interest rate unchanged.
RBNZ Governor Graeme Wheeler said he expected inflation to reach the midpoint of is 1-3% band earlier than previously projected, causing traders to push back expectation of further monetary easing.

After gaining steadily against the U.S. dollar since last Friday’s U.S. jobs data, the Euro retreated overnight.  EUR/USD may have found the top of the range as the common currency has been able to hold above key technical levels during the last two trading sessions.
There economic docket was unable to affect the direction of the Euro.  However, European Central Bank President Mario Draghi will speak at an Economic Forum in Brussels today and the market is likely to react to his comments.


June 3, 2016 (Commerzbank AG) – China’s demographic problem: China faces the prospect of an exceptionally rapid rise in the percentage of over-65s in the overall population from 2020. The number of those of working age is already declining. It will be difficult for the government to counter the trend, and economic competitiveness will continue to suffer. This will condemn strong Chinese economic growth to be a thing of the past.


Brexit: Interpreting the opinion polls

Opinion polls paint a mixed picture although bookmakers’ odds point to a more clear-cut outcome of the Brexit referendum. We offer an overview of issues in interpreting the polls and caution against complacency as the referendum campaign enters its final stages.

Outlook for the week of 6 to 10 June 2016

  • Economic data: German industrial production is likely to have grown by a decent monthly rate of 1.5% in April, thus prompting hopes of a strong Q2 GDP growth rate. But this was promoted by seasonal effects due to the early timing of Easter and we should beware of extrapolating too much from the data.
  • Bond market: Euro area bond markets appear comfortable at current levels, rendering a break out from the current range unlikely in the near-term. We expect 10y Bund yields to re-test the upper end of their recent range, particularly with the ECB kick-starting its corporate bond purchases on Wednesday.
  • FX market: The currency market is still not convinced of a summer Fed rate hike. Janet Yellen will be able to do some more convincing next week which could send the USD higher. Meanwhile, GBP remains weighed down by Brexit fears.
  • Equity market: Hopes of a US rate hike have recently sent the euro lower against the US dollar which will provide renewed tailwinds particularly to those German companies with business primarily in countries where trade is mostly done in US dollars or whose currencies are tied to the US dollar.
  • Commodity market: Due to recent big production losses, oil prices should be able to hold up at their current levels for the time being, especially if the EIA confirms that demand and supply are in balance.



June 3, 2016 (Tempus Inc.) – While currency markets traded in jerky ranges overnight, the greenback opened this morning mostly unchanged against the majority of its counterparts.  The range-bound volatility could be attributed to traders positioning themselves ahead of the week’s largest risk event, this morning’s Non-farm payroll number.

The U.S. dollar has lost about 1.0% across the board in early trading following a terrible jobs print.  The U.S. economy added a paltry 38K jobs in May, failing to meet expectations of a 160K gain.  The reading marks the smallest job growth in a one month time in nearly 6 years.  April’s reading was also downwardly revised to 123K from 160K.  The unemployment rate, however, fell to 4.7%, the lowest since 2008 but can be attributed to a falling participation rate.
The dismal data will surely decrease odds that the Federal Reserve will find the scope to raise interest rate later this month.  The dollar had gained throughout May as Fed members held a more hawkish tone.  However, the central bank maintained they would be data-dependent and today’s print will pour cold water on their recent tone.  The probability of a June rate hike last Friday stood at 30.0% but following today’s data, chances are now less than 10.0%.
The British pound was also flat overnight, but is set for its weakest week since March on “Brexit” worries.  With the risk of sounding like a broken record, the fate British pound continues to be in voter’s hands on June 23rd where U.K. citizens will decide whether the country will remain in the European Union.  The pound has been the second worst performer (after the Mexican peso) among 16 major currencies this year, as a “Leave” vote would likely decimate Europe’s second largest economy.

In a quiet overnight market, the New Zealand dollar was the standout by gaining over a half percent against the U.S. dollar.  The Kiwi is set to climb 2.0% against its American counterpart this week as traders have scaled back bets the central bank will cut rates at their next meeting.  Indeed, swap traders are now pricing in a 32% change of a cut at the June 9th meeting.  A month ago, chances were set at 80.0%.

June 2, 2016 (Tempus, Inc.) – Currency markets were mostly quiet overnight as traders awaited two sizeable risk events early today, the European Central Bank’s interest rate decision and ADP’s private U.S. jobs data.  However, both failed to shock investors causing the greenback to continue to hold recent ranges.

Companies added 173k workers to payrolls in May following a revised rise of 166K in April.  The print is right in line with traders’ estimates of a 173K gain.  However the revised April number is higher than the initial reading of 156K.  Market participants will now shift their focus to tomorrow’s Non-Farm payrolls print.  A better than expected print (160K jobs added) would likely increase odds that the Fed will raise rates by 25 basis points later this summer and cause the dollar to rally.   
The Euro is unchanged from yesterday’s close after the European Central Bank refrained from adding additional stimulus at their meeting this morning.  None of the economist polled by Bloomberg expected the central bank to change interest rates or current quantitative easing levels, allowing the EUR/USD to float in a tight range. 
Later, ECB President Mario Draghi will hold a press conference in Vienna and is expected to field questions on the central bank’s latest economic and price growth forecasts.  Consumer prices in the Euro-zone have failed to tick higher for four consecutive months causing doubt that stimulus added last year is having the desired effect.  If Draghi indicates that the ECB may be prepared to increase the bank’s monetary base in the coming months, the Euro would come under renewed pressure. This is especially true against the back drop of an increasingly hawkish Fed in the States. Conversely, however, if Draghi touts an improved outlook for growth in the region, the Euro could claw back some of its 3.0% losses from May.

The British pound has become a tough currency to gauge as the currency’s fortunes are being held hostage by the pending referendum on whether the U.K. will remain a member of the European Union.  The Sterling is slightly stronger today after two days of declines.  Recent polls have shown that the “”Leave” campaign has the momentum and may be pulling ahead of the “Remain” side.  It is widely thought that if the U.K. votes to leave Europe, the British pound can fall as much as 10% from its current levels against the U.S. dollar.  While we believe common sense will prevail and the U.K. will remain a member of Europe, the uncertainty will continue to wreak havoc on the Sterling for the remainder of the month.