Pound hits new low on Brexit nerves


The British currency fell as low as £1/$1.28 on Wednesday following uncertainties in the overall economy of the United Kingdom, after its decision to leave the European Union. The European market started firmer with the FTSE up 1.7 percent, the CAC in Paris 1.9 percent higher and Germany's DAX rising 1.3 percent.

The ratings agency had warned that deadlock on government policy after Saturday's inconclusive elections could endanger Australia's rating over the long run.

However, housebuilding stocks recovered on Friday, with analysts at UBS saying the recent drop in the sector could mark an attractive entry point for investors. However, investors are less sensitive to ratings these days given so many countries were downgraded in the wake of the global financial crisis and the Aussie soon steadied at $0.7511.

Bank of Japan Governor Haruhiko Kuroda said on Thursday that the central bank is ready to expand monetary stimulus further if needed to achieve its 2 per cent inflation target, but he made no mention of the Brexit vote that has spread turmoil in financial markets. We could see sterling end the year at or below $1.30, with some saying it could even go as low as $1.16.

It also kept Japanese shares on the defensive with the Nikkei flat in early trade.

Still, it was notable that while bond markets have been signaling recession, equities had stayed fairly resilient.

More importantly, JPMorgan believes, the Bank of England will revive its quantitative easing program while the British government reverses course on austerity and loosens fiscal policy, which could be a green light to fiscal expansion globally.

Minutes from the U.S. Federal Reserve's June policy meeting confirmed what was already suspected - that officials were concerned ahead of the Brexit vote, which subsequently erased $3 trillion from global equities over two days.

The dollar was lifted overnight when the Institute for Supply Management data revealed that growth in the U.S. economy's service sector increased in June at its fastest pace in seven months.

That helped the Dow rise 0.44 percent, while the S&P 500 gained 0.54 percent and the Nasdaq 0.75 percent. It has risen 11.5 percent in the three sessions to Monday.

HSBC lowered its year-end forecast for the euro-dollar pair after the vote, reasoning that Brexit would curtail exports from the Eurozone to the U.K and embolden right-wing political parties on the Continent, like those in France and the Netherlands, to push for referendums of their own. "It keeps strengthening as a safe-haven currency", he said, adding that the dollar might break under 100 yen again against the backdrop of uncertainty.

Fed funds futures pricing shows that no US rate increase is expected for at least a year, and that there is even a greater likelihood of a cut in the coming months than a hike.

No Fed hike until 2019?

In currencies, the dollar remained under pressure against the backdrop of low Treasury yields and the flattest US yield curve in nearly nine years.

"Indeed, an "impossible and ridiculous" call such as 1.00 percent 10-year U.S. Treasuries would start to look all too possible and extremely plausible".

In commodity markets, oil prices recouped some lost ground on the better US data and expectations for a sharp drop in crude stockpiles.

Brent crude futures hit a two-month low of $46.15 per barrel on Thursday and last traded at $46.88.