Daniel Been, Head of FX Research at ANZ , provides his view on what are the ramifications of Brexit for AUD and NZD, noting that the coming weeks will remain highly uncertain as the timing of the exit, the makeup of the UK’s leadership and the future of the EU remain in doubt.
This uncertainty can impact on the AUD and NZD through three channels. Market function, business and consumer confidence, and medium term global growth concerns.
For now the market is functioning well, but it is too soon to tell how large the impacts of growth concerns will be. In the meantime the antipodes will likely outperform the GBP, but valuation concerns mean other safe havens like the USD and JPY will continue to outperform significantly
In drawing conclusions about what this means for the AUD and NZD, a fundamental question needs to be answered. Do we think of them as economies that are still operating standard policy, that have relatively good nominal growth and that are open for trade and welcome globalisation? Or, will these positives ultimately be outweighed by the fact that they are both small open economies dependent on global trade and finance which cannot be wholly insulated from global shocks?
The truth probably lies somewhere in-between and while in some instances both currencies will be subject to a flight to quality, valuation remains critical. Currently, neither currency looks cheap on any metric, and as such, right now both are very vulnerable to lower global trade, weaker global growth and any deterioration in global sentiment.
This however, may take some time to manifest and so in the short term both currencies will probably outperform the GBP, but not the USD or other more defensive currencies
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