Breaking Down Brexit | Weekly Review And Preview

  • Monday, June 27, 2016

Welcome to the Signal’s “Weekly Review and Preview.” Each week, we analyze the most important communications from the previous week and give our thoughts on upcoming releases.

  • Special Brexit Review

Several central banks issued statements in response to the results of the Brexit vote. These statements–detailed below–echo the expectations of our colleagues at LH Meyer: that in the event of a vote to exit, central banks would likely issue public statements reiterating that their existing currency swap lines and liquidity facilities (in dollars and other currencies) remain in place.

Also noteworthy is the fact that the outcome of the vote mirrors the BOE’s recent sentiment trend: they talked up the economy in May, but, when the polls began to indicate the possibility of a “leave” vote, sentiment dropped as they began to warn about the potential repercussions.

BOE6MonthTrend

The Bank of England released a hawkish (Prattle score: 1.10) statement citing its “extensive contingency planning” and willingness to “take all necessary steps” to maintain monetary and financial stability.

The Fed was neutral (Prattle score: -0.03), stating that they are closely monitoring the situation and are prepared to provide dollar liquidity through swap lines.

The European Central Bank also announced their close monitoring of the situation, stating that they stand ready to maintain low and stable inflation as well as financial stability in a statement also scoring -0.03.

The Bank of Canada released a slightly more dovish (Prattle score: -0.51) version of the same statement, announcing that they are ready to provide liquidity swaps.

The Norges Bank struck a similar tone to that of the Fed and ECB, discussing their contingency planning for Brexit (Prattle score: -0.01).

The Reserve Bank of India provided a more pointed assessment of the global market turbulence resulting from the Brexit vote and indicated that they too stand ready to act (Prattle score: -0.66).

The Bank of Japan released the most dovish Brexit-related statement (Prattle score: -3.01) focusing on the risks to liquidity and financial stability.

  • Review

Federal Reserve
In brief: Uncertain of Rate Path
Analysis: Fed speakers covered the bases last week. Kashkari and Fischer eschewed monetary policy; Powell questioned the stability of LIBOR in the wake of Brexit. Yellen avoided direct reference to monetary policy in the prepared remarks of her Congressional testimony, but she did imply concern about lifting rates given the army of uncertainties on the horizon (Prattle score: -0.43). Kaplan echoed this unease, expressing the need for additional data before discussing hikes again.

European Central Bank
In brief: Rallied after Brexit vote
Analysis: While several policymakers spoke last week, Draghi gave the most pointed message: “Looking ahead, we expect the economic recovery to proceed at a moderate but steady pace.” Draghi went on to discuss the “common challenges” of a unified Europe, emphasizing the ECB’s intent to weather the Brexit storm (Prattle score: -0.28).

Reserve Bank of Australia
In brief: Hawkish and dovish
Analysis: The Reserve Bank of Australia (RBA) sent mixed signals this week. In a particularly hawkish speech (2.23), Guy Debelle asserted that the Aussie fixed income markets are doing well despite the instability overseas. On the other end of the spectrum, the RBA meeting minutes scored dovish (-0.54) and hinted at an August rate cut.

Bank of Brazil
In brief: Promoting ahead of Olympics
Analysis: The Bank of Brazil continues to talk up the economy (minutes score: 2.76) ahead of Rio.

Norges Bank
In brief: Held rates
Analysis: In a mildly hawkish statement (0.35), the Norges Bank held rates (as expected) as they waited to see the outcome of the referendum.

Bank of Turkey
In brief: Cut rates by 50bps
Analysis: With inflation falling, Turkey cut rates yet again. The statement was slightly hawkish (0.28), suggesting the bank was unperturbed by Brexit.

Bank of Japan
In brief: Trending dovish
Analysis: The BOJ was talkative last week. The April Minutes scored hawkish (1.86), corresponding with the surprise move to hold rates at that time. The June meeting summary was at the other end of the sentiment spectrum, scoring much more dovish (-1.17). Kuroda’s speech was also firmly dovish (-3.16) with a bleak assessment of the BOJ’s ability to deal with deflationary pressure.

BOJJune27_4months

  • Preview

Federal Reserve
Forecast: To signal rate hike path
Analysis: Speeches this week from Powell and Bullard are likely to signal that hikes aren’t coming anytime soon.

European Central Bank
Forecast: To signal stimulus plans
Analysis: The ECB forum will feature a number of speeches, but Draghi’s comments will set the tone. He should signal whether the ECB will provide stimulus on the heels of Brexit.

Bank of Turkey
Forecast: To signal rate path
Analysis: Turkey will provide minutes from its June monetary policy meeting this week, likely shedding light on whether they intend to cut rates even further.

Bank of Israel
Forecast: Likely to hold rates
Analysis: With sentiment trending at just above neutral, the Bank of Israel is likely to hold rates at its monetary policy meeting this week.

Bank of Mexico
Forecast: Likely to hold rates
Analysis: Although some have forecast a rate hike from the Bank of Mexico at its upcoming monetary policy meeting, the bank’s declining sentiment trend and the result of the Brexit vote suggest an impending rate hold, especially with the Peso performing reasonably well.

MEXJune27_6months

Bank of Taiwan
Forecast: Likely to hold rates
Analysis: Conversely, Taiwan is expected by many to cut rates (to strengthen the TWD) at their policy meeting this week, but we’re expecting a hold. The bank’s sentiment has been trending hawkish since April and, with Brexit already bolstering the TWD, a cut seems unlikely.

TAIJune27_6months

Reserve Bank of Australia
Forecast: To signal rate path
Analysis: In the wake of the vote, investors fled to the security of the US and Japanese markets, and Australia may be the next safe haven. How will this affect RBA policy? It’s unclear. The AUD spiked after the vote, but this could be a double-edged sword for policymakers looking to simultaneously bolster exports and financial stability. The coming weeks will signal whether a cut or a hold is in the cards for August.

The Signal Team

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