Daily Market Digest: Brexit Talks Dominate on a Slow Moving Day

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Mark Carney_Brexit

Image via www.bankofengland.co.uk / Flickr. Photographer: James Oxley

British industry and key officials are weighing in on the outcome of the Brexit vote on a day where most of the Europe is closed due to Whit-Monday holiday. The US NY Fed Empire state manufacturing index showed a contraction in May.

Today’s Economic events

  • UK Rightmove HPI m/m 0.40% vs. 1.30% previously
  • Japan PPI y/y -4.20% vs. -3.70%
  • Japan preliminary machine tool orders y/y -26.40% vs. -21.20%
  • US Empire state manufacturing index -9.0 vs. 7.2

Coming up

  • NAHB Housing market Index
  • BoC review
  • US TIC long term purchases

Japan PPI falls 0.30% in April

Producer prices in Japan fell 0.30% on a month over month basis in April, data from the Bank of Japan showed on Monday. The 0.30% decline missed estimates of a 0.20% increase. Japan’s PPI fell 0.10% in March. On a yearly basis, producer prices in Japan fell 4.20% missing estimates of a 3.70% decline and extending March’s decline of 3.80%. Export prices gained 0.70% in the month but were down 4.20% on the yearly basis while import prices increased 0.80% on a month over month basis but fell 13.70% on the year. Last week, BoJ officials came out strongly against the yen’s appreciation with finance minister Taro Aso threatening to intervene in the currency markets. However, ahead of the G7 meetings due to take place in Tokyo starting this Friday any intervention is unlikely. The yen managed to give up some of the gains last week trading above 108 levels for the most part. However, not all analysts are convinced that USDJPY will move higher.

Taisuke Tanaka, Deutsche Securities chief FX strategist notes “The USD will likely head lower to Y105 or below in the next several weeks, due to the U.S. slowdown, China worries and difficulty for Tokyo to intervene to stem the yen strength.” Tanaka said that over the short-term, the US dollar might not gain the downside momentum ahead of upbeat data such as housing starts, [inflation, building permits] due tomorrow, but says that “a narrowing of… US economic growth remains as the biggest focus for the dollar against the yen.” Tanaka expects the dollar to fall to 103Yen at end June.

CBI, British Business lobby cuts GDP outlook on Brexit

Britain’s largest business lobby, the Confederation of British Industry issued a stark warning on Monday weighing in on the upcoming EU referendum vote in the UK. Calling it a “dark cloud of uncertainty” in reference to the outcome of the vote, the business lobby cut GDP forecasts to 2.0% for 2016 and 2017, in line with the Bank of England’s growth forecasts released last week. The warning follows last week’s IMF and BoE warning that a vote to leave the EU would be ‘costly’ for Britons. As the referendum date inches closer, rhetoric from both the leave and stay camp continue to grow stronger. So far, the campaigners to leave the EU have been basing their arguments on political reasons, while the business fraternity has clearly sided with the ‘Stay’ camp. Earlier today, Ryanair CEO Michael o’Leary said: “if Britain leaves the EU single market, (as Gove said) airfares and holiday prices will rise.

There has been a growing concern globally as well, with Canada being the latest to weigh in following Japanese Premier Shinzo Abe’s comments weeks ago where he encouraged Britain to stay in the EU.

CBI Director General Carolyn Fairbairn said “A dark cloud of uncertainty is looming over global growth, particularly around weakening emerging markets and the outcome of the EU referendum, which is chilling some firms’ plans to invest…We expect the U.K.’s growth path to continue, but it is likely to be at a slower rate than previously thought.

NY Fed Manufacturing Index turns negative

The New York manufacturing index unexpectedly declined in May, data from the NY Federal Reserve showed on Monday. Business activity among New York manufacturers slipped to -9.0 in May erasing April’s 9.6 reading, indicating a contraction in the sector in the region. Economists were expecting the manufacturing index to show a positive reading of 7.2. New orders slipped to -5.54 in May compared to 11.14 in April while NY Fed May employment increased to 2.08 compared to 1.92 in April. The data suggests that factories in the region continue to struggle amid the most growth seen in March and April.

The dollar slipped on the news with gold prices edging higher and testing session highs of 1288.58, posting a 5-day high. On a daily basis, gold prices are up 1.12%. USDJPY was more subdued with the dollar up 0.20% against the yen, trading at 108.82 after the release.

GBP could weaken 3 – 4% before UK EU vote – ING

ING analysts, in a research note published today state that even a 25% chance for Brexit (a vote to leave the EU) could suggest that the sterling could trade 3% – 4% weaker before the June 23 referendum on EU membership. Analysts note that polls released so far show a 50 – 50 split among decided voters while British bookmakers attach a 25% – 30% probability of a Brexit.

So far GBP has followed the bookmakers, with relatively little Brexit risk priced in,” ING analysts said. The GBPUSD forecasts from ING cite $1.38 in one month and forecasts $1.51 in three months on a vote to stay while it expects $1.20 if the vote to leave wins. On the other hand, HSBC’s David Bloom said: “Cable will hit 1.60 by the end of the year.

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John has over 8 years of experience specializing in the currency markets, tracking the macroeconomic and geopolitical developments shaping the financial markets. John applies a mix of fundamental and technical analysis and has a special interest in inter-market analysis and global politics.

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John has over 8 years of experience specializing in the currency markets, tracking the macroeconomic and geopolitical developments shaping the financial markets. John applies a mix of fundamental and technical analysis and has a special interest in inter-market analysis and global politics.