Risk assets are surging higher. The world is good again, only two days after it was looking like armageddon.
Brexit fears? What fears? The markets, as they have been programmed to do over the past eight years, have yet again adopted the view that “bad news is good news”.
Brexit = uncertainty = central bank easing = time to buy any risk assets. It’s the equation that markets have lived by since the depths of the global financial crisis in late 2008.
Simply swap out Brexit for China, US dollar, Greece, emerging markets or renminbi, and the rest of the equation remains the same. The list could go on forever, take your pick.
As my colleague Greg Mckenna has written recently, central banks’ have got this, just as they have over past periods of uncertainty. The markets certainly think so.
The Australian dollar, as a well-known proxy for investor risk appetite, has not been left behind in the risk rally frenzy. After to dropping to as low as 73 cents last Friday, the AUD/USD has ripped higher over the last four sessions, jumping close to 2%.
It’s been a stellar recovery, and one that is not all that surprising given the pattern seen in recent years.
The question many are now asking is how much further the Aussie can rally? If global central banks, including the US Federal Reserve, are about to take a dovish turn, surely that’ll on assist the Aussie’s march higher.
For all it’s had thrown at it since last Friday, the AUD/USD is only down 2.2% from when the UK polls closed. Given its resilience, it’s understandable that some think there’s more upside is to come.
Not so fast, says ANZ’s FX strategy team. Despite its recent resurgence, uncertainty over Brexit will persist for some time yet, keeping the Aussie under pressure in the period ahead.
“Brexit is now a reality. The damage is done and we now have to navigate through an environment of heightened uncertainty,” says strategists at the bank.
“Though the UK is far away, this kind of global uncertainty is never a good thing for global confidence or risk appetite. By extension, as a small, open economy dependent on global trade and funding, the AUD should weaken in this environment.”
The bank expects that the Aussie will underperform safe haven currencies such as the US dollar, Japanese yen and the Swiss franc in such an environment, adding that upcoming domestic economic data will play a lesser role in dictating movements in the currency.
“For the AUD, we would fade better-than-expected data although worse-than-expected data may see markets reinforce expectations of near-term RBA easing and see the AUD trade lower,” it says.
In light of this view, ANZ has left its forecasts for the AUD/USD unchanged from those offered before the Brexit vote, suggesting that it is likely to fall to 67 cents by the end of the year before bottoming out at 66 cents in the first half of 2017.
From its present level, that would represent a decline of 11% over the year ahead.
Now listen to this week’s Devils and Details podcast, we’re joined by Michael McCarthy, chief markets strategist at CMC Markets, to discuss the economic backdrop to the decision facing voters at the polls.