GBP TUMBLES AHEAD OF BREXIT VOTE, VOLATILITY RISES, FED EXPECTS STRONG RETAIL SALES

  • Looking at the option price on the S&P 500, it seems that investors are getting reading for a drop in the index
  • As the actual consequences of a Brexit are difficult to envisage and therefore price in, the sterling should not move much lower
  • EUR/CHF bias remains on the downside as on Thursday the SNB will communicate its interest rate decision
  • We do not expect the SNB to remain sidelined for long
  • USD/JPY – investors may want to further test 105.23-55 during the coming days. US retail, due for release this afternoon may trigger this in the event of a poor reading
  • Stronger than expected May retail sales data would provide some support to the Fed’s medium-term view of increasing rates
  • After last Friday’s disappointing jobs report we maintain our view that no rate hike will happen this year. Therefore, we think that the dollar should continue weakening and we target 1.1500 over the medium-term

Investors across the globe are becoming increasingly anxious in the run-up to several key dates. Almost all equity indices ended in red yesterday as traders piled into safe haven assets, pushing volatility to sky-high levels. The CBOE volatility index (VIX) climbed more than 23% on Monday after a surge of 16% last Friday, while the S&P 500 lost 1.70% over the same period. Looking at the option price on the S&P 500, it seems that investors are getting reading for a drop of the index as the 1 month 25 delta risk reversal fell to -7.50% on Monday compared to -4.50% on Friday. However, given the substantial gains of the equity market over the last few months, investors are less reluctant to buy protection to secure those gains.

In the FX market, the pound sterling is the main focus of attention as June 23 draws closer. The pound fell 0.67% against the US dollar to 1.4157. Since the beginning of May, the currency is down 4.10% and is now testing the low from mid-April as a Brexit seems to have gained traction over the last few days, according to the latest poll. The actual consequences of a Brexit are difficult to price in and the market is closely monitoring the polls – so even in the event of a Brexit, the sterling should not move much lower.

EUR/CHF stabilised somewhat in Asia but the bias remains on the downside. On Thursday, the SNB will communicate its interest rate decision as well as its latest forecast. The CHF should remain under substantial buying pressure as we approach the UK referendum. Moreover, the mounting risk-off sentiment has accelerated the franc’s rise. We do not expect the SNB to remain sidelined for too long; however Thomas Jordan still has some room before stepping into the market to defend the CHF.

USD/JPY moved slightly lower overnight as equities were set to end the day in negative territory. On the downside, the strong 105.23-55 support area is still standing, however, given the solid demand for safe haven asset, investors may want to test that level further during the upcoming days. US retail, due for release this afternoon may be that trigger in the event of a poor reading.

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Yann Quelenn, market analyst: Fed expects strong retail sales: April retail sales were strong, increasing by 1.3% m/m. May advance data is expected to be released this early afternoon and market consensus is at 0.3% m/m. However, this will not affect the Fed’s rate decision at the FOMC tomorrow, where it is expected rates will be kept unchanged at 0.25% – 0.50%. For the time being financial markets have completely ruled out a June rate hike and good data today would provide some relief to the American central bank whose monetary policy results are somewhat cumbersome. Strong results would also provide some support to its medium-term view of increasing rates.

After last Friday’s disappointing jobs report, we maintain our view that no rate hike will happen this year. Financial markets are nonetheless pricing a Fed rate hike probability for September above 28%. We think that the dollar should continue weakening and we target the 1.1500 over the medium-term.”

In the equity market, the rebound is not for today as most Asian equity indices continued to lose ground. The Nikkei 225 was off 1%, while the broader Topix index fell 0.98%. In mainland China, the CSI 300 was down -0.10%, while offshore the Hang Seng slip 0.17%, the Taiex bounced back +0.47%. In Europe, futures on the Footsie are down -0.49% as are those on the DAX -0.91%. Finally, the SMI was down -0.95%.

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