Global Forex Market
UK voters had made a momentous choice but the repercussions would go wider than that.
Britain will continue to face an unsolvable dilemma between its economic and political interests as it deemed to be a case of hallowing out of their democracy. One thing that was certain is the uncertainty as seen in the wide gyration in market volatility and wider bid-ask spread. George Soros, the billionaire who bet against the sterling in 1992, wrote in an article for Britain’s Guardian newspaper on Tuesday that a vote to leave would trigger a disruptive devaluation in Britain’s currency.
Leading to Brexit voting, sterling led most major currencies higher against the US dollar as polls indicated a subsiding likelihood of Britain voting to exit the European Union. The 1.7% rally against the US dollar was on track to 3-week highs, a rally on pace for its best day in 7 years. British bookies, which considered by some to be more reliable than British pollsters, indicated about a 25% chance of a Brexit, down substantially from a 40% probability – the day pro-EU lawmaker, Jo Cox, was killed. However, as poll results were tilting towards Brexit yesterday, the market reaction was extreme as sterling plunged to its lowest of 1.333, a level not seen since Sept 9, 1985.
In addition to the Brexit-related rally, the US dollar also looked for drivers in congressional testimony on the economy by Fed chairman Janet Yellen on Tuesday and Wednesday, which turned out to be a non-event. She reiterated that the Fed is going to “proceed cautiously in raising rates”. As a result, the USD Index (DXY) has taken out the June 2008 lows and technically the DXY could make a move back to May 2003 lows when euro also traded at its 2016 high of 1.1615.
As commodity made some broad gains in the early part of the week, NZ dollar and Australian dollar were the best performing among G-10 currencies but the tide turned against them yesterday. The yen depreciated 0.71% against US dollar on risk-on trading sentiment and worries about potential Bank of Japan’s verbal and actual intervention but it became top gainer among G-10 currencies yesterday on safe haven flows and as mar- ket re-pricing for higher UK’s political risk premium.
Asia ex-Japan currencies across the board were having similar fate yesterday as market sentiment turned sour with a period of exceptional uncertainty including a potential leadership battle in the Conservative party, timing of the trigger of the EU’s Article 50 as well as potential Scottish referendum too. Leading the loss were Indian rupee that lost 1.47% and Philippine peso of 1.03% against US dollar on foreign equity selling in risk-off environment. Ringgit traded with a wider band of 3.9890 to a high of 4.1368 due to change in risk sentiment as Brexit results were tilting toward a “Leave” outcome.
Consequently, the 1-month USD/ MYR volatility rose from low of 10.23% on Tuesday to high of 11.74%, the 5-year CDS inched up by 16.7 points to 167.1 at time of writing and cross SGD/MYR rebounded from a low of 2.972 to trade above 3.028 level on Friday while equity market fell 22.7 points to 1,617 between Thursday and Friday. It was interesting to note that among Asia ex-Japan currencies, ringgit fell 0.36% against US dollar, relatively unscratched compared to other pair of currencies. Singapore dollar being one of the preferred safe-haven currencies in Asia fell 0.85% against US dollar.