Afternoon analysis 24.06.2016:
The pound is becoming stable in the area of an 8% losses against the dollar. The zloty is working-off some of its losses as well. However, the closer the Polish currency is to the levels that were seen yesterday, the lower the chances for an appreciation. The weaker franc is a result of the SNB actions.
First strike is behind us
We can say that the culmination of the first stage of the market disturbances is behind us. The market is beginning to consolidate near the 8% overvalue of the pound against the dollar, a 5% depreciation of oil and a 6-12% depreciation of the European stock market indexes.
However, the number of potential risks for the pound is not decreasing. They include a general increase in risk aversion that is negative for the British currency, as well as external imbalance that we have mentioned in the Daily analysis. It is also worth noting that the market of terminal contracts for interest rates is estimating a 0.5% depreciation. Moreover, there are speculations regarding an increase in quantitative easing.
There are, of course, political matters as well. It is possible that the new prime minister will be appointed in October. When we do, the negotiations regarding the conditions of the UK leaving the EU may start. This is quite a lot of time considering the market standards. Especially considering that entrepreneurs would like to know the perspectives of their activity within the European Union. This may be a long period for consumers as well. Despite a relatively positive condition of the economy, as well as basically full employment, a sudden withhold of purchasing may cause a recession in the UK.
We cannot forget about separative movements. They will be intensified by a clear division that Britain experienced during the referendum. England voted for Brexit, while Scotland and Northern Ireland both supported the European Union. Let's remind that two years ago there was a referendum regarding Scotland leaving the United Kingdom.
At that time, the advantage for Scots who wanted to stay within the United Kingdom was at the 10% level. Currently, however, the Scottish minister, Nicola Sturgeon claims that another referendum is very likely.
The uncertainty will probably remain in the pound market for the next few months. If the economy is not capable of handling today's strong strike, a pressure on the pound will increase. Moreover, at least a few percent overvalue of the British currency is inevitable.
Zloty is likely to remain under pressure
The EUR/PLN at the 4.42 level is an optimistic scenario. However, considering the scale of the event, there are small chances for the euro to return below the 4.40 limit. It is even less likely to see the return of the USD/PLN to the range in which it was for a bigger part of the second quarter.
It is worth focusing on the franc as well. Today's rebound of the Swiss currency to the 4.25 area (0.30 PLN within just few hours), showed a scale of an increase in the global risk aversion. On the other hand, depreciation of the franc to 4.10 was not only the element of the market powers. In the morning, the Swiss National Bank confirmed that it had intervened in order to wear-off the franc. Thus, we can claim that a decrease in the CHF is quite artificial. This generates a risk that if the intervention effect fades out, the Swiss currency may strengthen suddenly, as well as significantly.
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