Sailing into the unknown:
FX markets were surprised by the Brexit vote. The implications of the referendum result are hard to nail down, but we expect them to be negative in most scenarios. We would also expect markets to start pricing some tail risks that other countries may decide to leave the EU as well. More broadly, we would expect Brexit to trigger a chain of non-linear events well into the long-term that are hard to predict and may seem unrelated today, a butterfly effect on steroids. Brexit could prove to be just the end of the beginning.
Negative for European currencies:
We believe that the result of the UK referendum for exit from the EU is negative for the major European currencies, most for GBP, then for EUR. We expect it to be positive for JPY, followed by the USD. High beta currencies could find support in further easing by major central banks in the short term.
New projections:
In this context, we are revising our G10 projections. Our baseline was assuming that the UK would stay in the EU, although this was a very close call. However, we avoid bold changes in projections beyond GBP, as no G10 economy is strong enough to afford a strong currency.
We expect EUR/USD to end 2016 at 1.05, from 1.08 before, appreciating to 1.10 by the end of 2017, from 1.15 before.
We expect JPY to remain strong and now forecast USD/JPY to end 2016 at 105. Our previous projection was 110, but with substantial downside risks. Moreover, USDJPY can overshoot below 100 in the short term.
We now expect GBP/USD to end 2016 at 1.30, from 1.59 in the Remain scenario. We expect further GBP weakness in 2017.
*BofAML's forecasts last updated on eFXplus on June 27.
Copyright © 2016 BofAML, eFXnews™Original Article
