J U N E 2016

M O N T H L Y M A R K E T I N S I G H T S

Brexit, Brexit, Brexit! News flow and headlines related to the Brexit story will continue to dominate global market activity, with developments that play up the risks to the global economic outlook likely to prove supportive for the dollar (outside of USD/JPY).

The Fed’s July 26-27 FOMC monetary policy meeting, previously seen as a very close call as to whether rates would rise by another 25 basis points, has been largely reduced to a non-event in the wake of the market uncertainty following the Brexit.

The typically closely watched payrolls report due out on July 8th has also seen its likely impact on the dollar minimized by the historic Brexit vote. Even a very strong rise in payrolls will not likely move the needle on the post-Brexit steady Fed outlook.

The risk of coordinated or unilateral central bank action (BOJ, BOE or ECB) has increased in the wake of the market turmoil following the Brexit. As such, market will remain extremely nervous, choppy and often erratic.

USDJUNE MARKET REVIEW THE MONTH AHEAD

M O N T H L Y M A R K E T I N S I G H T S

The U.S. dollar index soared to its highest level in three and a half months in late June in the immediate aftermath of the U.K.’s shocking vote to leave the EU.

The broad flight to safety across global markets in the wake of the Brexit vote proved broadly supportive for the greenback.

While any hopes of a Fed rate hike in the months ahead largely evaporated with the Brexit vote, the dollar nevertheless outperformed thanks to its safe harbor status.

Dollar/yen bucked the trend of an otherwise stronger USD, falling to its lowest level since 2013 amid the intense market volatility following the Brexit vote.

USD INDEX JUNE97.0

96.5

96.0

95.5

95.0

94.5

94.0

93.5

93.0

92.5

92.0

91.5

KEY MARKET EVENTS

JUL 6 JUNE ISM NON-MANUFACTURING INDEX JUL 15 JUNE RETAIL SALES

JUL 27 FEDERAL RESERVE’S FOMC MONETARY POLICY MEETING JUL 29 ADVANCE READING OF Q2 GDP

JUL 8 JUNE EMPLOYMENT REPORT

The euro tumbled to a three and a half-month low against the U.S. dollar in late June following the news that the U.K. shockingly voted to leave the EU after over four decades of membership.

The resulting uncertainty surrounding the future of the U.K.-EU relationship, the increased risk of a euro zone recession and additional monetary easing by the ECB as well as the risk of other disgruntled nations considering leaving the bloc is very negative for the euro.

Relatively upbeat euro zone economic data, including the first positive print for year-over-year CPI in five months in June, was largely ignored amid the Brexit market turmoil.

A post-Brexit EU leaders summit in Brussels took center stage in late June as investors try to gauge the bloc’s response to the U.K.’s vote as well as the extent to which EU damage control would limit the contagion of other members also eyeing the exits.

Brexit news is expected to dominate trade in the euro and in most major currencies as the possible risk of damage to the euro zone economy as well as the resulting need for additional stimulus to avoid recession continues to be weighed.

The ECB’s meeting on July 21st will be critical in assessing any change in tone from policymakers in the wake of the Brexit as well as helping set market expectations for the risk of additional ECB easing to help minimize the fallout of the Brexit on the euro zone economy.

While economic data will likely continue to take a backseat to Brexit-related headlines, late July readings of euro zone PMI’s as well as the first reading of Q2 GDP for the 19-member bloc on July 29th will highlight any initially impact from Brexit-related uncertainty on the real economy. Overall global financial market conditions will be a key driver of the euro’s direction, given that the Brexit has rendered the single currency especially vulnerable to risk-related flows and to the overall appetite among investors for risk in their portfolios.

EURJUNE MARKET REVIEW THE MONTH AHEAD

M O N T H L Y M A R K E T I N S I G H T S

KEY MARKET EVENTS

JUL 1 JUNE MANUFACTURING PMI JUL 15 EUROPEAN CENTRAL BANK GOVERNING COUNCIL MEETING

JUL 29 JUNE CPI (ADVANCE READING) ADVANCE READING OF Q2 GDP

JUL 5 MAY RETAIL SALES

EUR/USD JUNE1.15

1.14

1.13

1.12

1.11

1.10

1.09

1.08

The Japanese yen rocketed to its highest level against the greenback since late 2013 in the wake of the massive flight to safety across global markets in the wake of the historic vote by the U.K. to leave the EU.

Japan’s deep and liquid financial markets as well as the nation’s massive current account surplus make it a favorite harbor for investors to ride out economic and financial market volatility. The Brexit sent the yen to three and a half-year highs versus the euro and the British pound.

Investors focused on the risks of BOJ monetary easing or intervention to try to limit the strong yen’s detrimental impact on the nation’s struggling economy. The Brexit risk was seen as limiting the odds of policy action in June but could result in some easing or outright currency intervention to weaken the yen in the months ahead.

While flight to safety flows across global markets dominated the yen’s trade in June, the “Tankan” survey of large manufactures’ sentiment late in the month, which is a closely watched indicator by the BOJ, was seen as a final hurdle to further monetary stimulus by the bank.

The yen, perhaps more than any other major currency, will be driven by broader global market sentiment and the overall level of investor risk appetite. Brexit-related headlines that play up the risks to the global economic and financial outlook will send investors fleeing to the relative safety of yen assets.

Speculation has swirled throughout markets that the BOJ could be planning an emergency meeting in early July, well ahead of the scheduled July 28th meeting, to ease monetary conditions in support of Japan’s struggling economy.

Outright currency market intervention to weaken the yen following its massive surge in the wake of the Brexit has become much more likely. Japanese policymakers are unlikely to sit idly by while the rising yen threatens what little economic progress made over recent years.

While economic data remains likely to play second fiddle to Brexit news, Japanese trade and CPI data in late July will be closely watched for further signs that the strong yen is acting as a headwind to the nation’s critical exports and keeping prices broadly pressured.

JPYJUNE MARKET REVIEW THE MONTH AHEAD

M O N T H L Y M A R K E T I N S I G H T S

KEY MARKET EVENTS

JUL 7 MAY CURRENT ACCOUNT JUL 24 MAY EXPORTS

JUL 28 MAY CPI BANK OF JAPAN MONETARY POLICY MEETING

JUL 10 MAY MACHINERY ORDERS

USD/JPY JUNE112

110

108

106

104

102

100

98

GBPThe Brexit story will continue to dominate trade in the British pound. As yet, few details have emerged regarding the timeline for the U.K.-EU divorce, the what the future relationship between the U.K. and the EU will look like, or even who will take over to lead the nation after current Prime Minister David Cameron steps down.

Invoking “article 50” of the Lisbon Treaty, which will formally begin the two-year exit process from the EU will be a critical event. Until it is officially invoked, some investors will hold out hope that a true Brexit can still be avoided.

The Bank of England meets on July 14 and looks increasingly likely to either cut lending rates from current record low levels or to fire up its printing presses, restarting its quantitative easing program of asset purchases in the wake of the Brexit vote.

Economic data will take a backseat to Brexit headlines for the foreseeable future but upcoming readings of PMI’s, retail sales and Q2 GDP will incorporate some of the market uncertainty leading up to the Brexit vote and could be a signal of the recession risk going forward.

JUNE MARKET REVIEW THE MONTH AHEAD

History was made when the U.K. became the first nation to vote to leave the 28-member European Union. Financial market history was also made when as a result of the Brexit vote, the pound collapsed by 10% in a single session to hit its lowest level in 31-years against the dollar. Following the single biggest daily selloff in the pound in history, investors continued to see further downside risk amid historic uncertainty regarding the U.K.-EU relationship, the risk of the U.K. slipping into recession, likely BOE monetary easing and British political turmoil. Most financial markets and nearly all U.K. odds makers called the outcome of the vote completely wrong. The surprisingly laissez faire attitude of most market participants ahead of the vote partially resulted in the historic moves in the pound and in broader financial markets. Bank of England Governor Mark Carney said in late June that acting sooner rather than later to support the U.K. economy through monetary stimulus was warranted, prompting many investors to price possible rate cuts in either July or August.

KEY MARKET EVENTS

JUL 5 JUNE PMI SERVICES SECTOR INDEX JUL 20 JUNE CLAIMANT COUNT

JUL 21 JUNE RETAIL SALES JUL 27 PRELIMINARY READING OF Q2 GDP

JUL 14 BANK OF ENGLAND MPC MEETING

GBP/USD JUNE1.55

1.50

1.45

1.40

1.35

1.30

1.25

1.20

M O N T H L Y M A R K E T I N S I G H T S

The Canadian dollar fell close to a one-month trough against the greenback in the wake of the U.K.’s historic vote to leave the EU. While there is little direct economic consequence from a Brexit on Canada’s outlook, the resulting drop in risk assets, commodities and oil in particular remains CAD-negative.

While the loonie’s commodity counterparts from Australia and New Zealand remain more vulnerable to worries about the global economic outlook and overall investor risk appetite, the Canadian dollar enjoys a slightly better outlook given that it’s main exposure is still to the relatively healthy U.S. economy.

Crude oil initially fell but quickly stabilized in the wake of the Brexit news. While further downside risk for oil and the Canadian dollar are likely, crude’s ability to hold above $45.75/barrel will continue to limit CAD losses versus the greenback.

The Federal Reserve was widely expected to raise interest rates twice before the year-end prior to the Brexit news. The reduction in rate hike expectations to zero have limited the U.S. dollar’s ability to rally more strongly against the loonie.

All Brexit-related headlines will continue to be closely watched by global market participants and any negative impact they have on the global economic outlook and commodities will hurt the Canadian dollar.

Crude oil in particular will continue to play a major role in the loonie’s direction. A fall below $45.75/barrel could be particularly negative for the Canadian dollar, whose economy relies heavily on the production and export of oil and energy products.

U.S. economic reports will also play into the loonie’s performance, with a soft payrolls report in the U.S. and a dovish Fed in late July likely to keep the greenback’s upside limited.

The Bank of Canada will meet in mid-July and while no change in Canadian monetary policy is expected, investor will be paying especially close attention to the language in the statement to see if the rate cut risks before the end of the year have increase in the wake of the Brexit vote.

CAD

KEY MARKET EVENTS

JUL 6 MAY TRADE BALANCE JUL 13 BANK OF CANADA MONETARY POLICY ANNOUNCEMENT

JUL 22 MAY CPI

JUNE MARKET REVIEW THE MONTH AHEAD

M O N T H L Y M A R K E T I N S I G H T S

USD/CAD JUNE1.32

1.31

1.30

1.29

1.28

1.27

1.26

1.25

1.24

JUL 29 MAY GDP

JUL 8 JUNE EMPLOYMENT REPORT

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