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According to Goldman Sachs markets remain focused on the UK referendum and its implications for asset prices. In the past two weeks, 'Brexit risk premia' have been priced into UK and foreign assets, and we expect risk to continue to underperform till June 23.
Past the date of the referendum, asset prices are likely to move sharply regardless of the outcome of the referendum: in the event of a 'Remain' vote, we would expect markets to price out the 'Brexit risk premia'; following a 'Leave' vote prices would most likely incorporate the additional uncertainty that such a vote would generate
Following a 'Leave' vote, we would consider long positions in currencies that, in our view, are structurally stronger. For example, the CHF and NOK offer compelling upside structurally and tactically, as we think that the SNB and Norges Bank are less likely to respond aggressively to CHF and NOK strength.
Among the currencies that are likely to underperform, our analysis suggests that, cumulative over six months, Sterling could weaken by about 11% and the Euro by 4% in trade-weighted terms versus a basket of major DM currencies if uncertainty increases as much as it did after the Lehman collapse. We also like downside in the AUD and NZD, where our economists expect more policy easing in H2 even in a 'Remain' vote scenario. In the event of a 'Leave' vote, the currency pairs that we think should depreciate the most are GBP/CHF and EUR/CHF.
If voters decide that the UK should continue to be a member of the European Union, we would anticipate a strong appreciation of Sterling, which is also implicitly assumed in the Bank of England's May Inflation Report. For all G10 currencies, in the event of a 'Remain' vote our recent FX forecasts would remain our base case.
Tactically, EUR/USD would likely see a decent upside move in response to a 'Remain' vote, and contrary to our directional bullish view on the USD. After the latest FOMC meeting, our economists adjusted the subjective probabilities for a rate increase at the next two meetings, lowering July to 25% (from 35%) and raising September to 40% (from 35%). Although the probability we assign to a Fed hike in July remains higher than that priced by the fed funds future market, it is unlikely that investors will reprice such probability significantly to the upside, at least until the next US employment report, which will be released on July 8.
However, the EUR should weaken versus Sterling. When EUR/GBP stood at 0.76, we quantified the 'Brexit' risk premium at around 5-8 big figures. Since then, EUR/GBP has moved up almost another 3 big figures. Hence, in a 'Remain' scenario EUR/GBP could move sharply towards our 12-month forecast of 0.70.
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