This article was written by Michael Oyebamiji, an FX analyst with a main focus on G-10 currencies.
In the next couple of days, it will be one month after the Brexit referendum in which the majority voted to leave the European Union. Leading up to the referendum, there were many arguments in favour and against both leaving and staying in the Union.
The most controversial of all was that the UK economy would go into recession, the global economy would also feel the impact, and that the UK might not get a trade deal any time soon. To the surprise of those expecting a market crash, the Brexit seems to be a blessing for the financial markets. We have seen the SPX500 marking a new record high at 2177, the Dow Jones also reaching a new record high at 18,650, while the FTSE 100 has rallied back above 6,700.
The biggest loser so far has been the British pound (GBP) that has lost more than 10% of its value in the last couple of weeks. This is however a good thing for manufactures in the UK; this helps them to export at cheaper prices which allows for higher profit margin.
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Let’s look ahead at what major central banks’ policies could be as we go through this summer and consider the possible impact of the post-Brexit landscape. Firstly, the Bank of England is likely to introduce quantitative easing. It could come as early as August, which is when the next BoE meeting will be held. The major impact of this policy will be a knockdown impact on the GBP and the stock market likely rallying to new highs. I expect the BoE to leave interest rates unchanged. Also, the European Central Bank is expected to keep policy unchanged later today. The president will give a press conference where he will highlight possible policies to be adopted later on.
Secondly, the Bank of Japan is expected to introduce an alternative to the ongoing QE called ‘helicopter money’ – this has never happened before in any part of world. This policy is expected to stimulate growth, drive demand and drive inflation towards the 2% target of the BoJ.
Furthermore, the Federal Reserve might hint at a 0.25% hike towards the end of the year. This will be based on incoming data from the United States economy in the next couple of weeks. if we continue to see stronger data, the Federal Reserve might be tempted to push for a rate hike.
Finally, China has been a major economy with a lot of doubt regarding the slowdown in their economic activities. The Chinese economy has been a bit slow as a result of the fall in global demand. The Chinese government is now trying to diversify its economy away from manufacturing into a service economy.
In an attempt to achieve this, we have seen many attempts to devalue the yuan through massive stimulus. This has helped devalue the yuan to a certain extent and we have seen a rebound in the Chinese GDP toward the 2016 target of 6.5% -7%. The big question is, if the PBOC stops injecting money into the economy, can the growth be sustained?