market views

Review & Focus®

Chuck Butler | July 1, 2016 9 MIN READ

June did bust out all over, with the currencies, for the most part recouping the losses they took in May. But the biggest event of the month was the Brexit referendum, which was held on June 23, 2016. You may recall me talking about this upcoming referendum a couple of months back. Brexit stands for British Exit from the European Union (EU).

A Historical Event?

The British voters spoke, and they wanted their sovereignty back, and from the referendum results, they will get it. But not for free, there will be a cost, and that cost has first showed up in the value of their currency. Pound sterling, or just sterling, initially lost 12% vs. the dollar after the referendum showed that the "leave the EU vote" had won. But that’s just the tip of the iceberg. There are other things that could very well come from this referendum result.

But the first knee-jerk reaction has been a flight to safety assets. That included dollars, yen, U.S. Treasuries, and gold. You may notice that one of the so-called safety assets, Swiss francs, was not there. Yes, even francs got sold alongside euros, and every other currency that isn’t yen and dollars. On the first day following the referendum’s outcome, the U.S. Treasury dropped 25 basis points in yield to 1.49%. (Remember bond pricing has yields and dollar price inverted, so as yields drop, the dollar price of the bond goes higher.) The Japanese yen saw two whole figures drop overnight as yen went from 104.65 to 102.20. (Remember, yen is a European-priced currency so as the price goes down, the value vs. the dollar rises.) And finally, gold rose $64 overnight to $1,327.00, but the rot on the currencies’ vines has been exposed, and it’s going to take a long time for them to recover.

So, was this a historical event? What will the unintended consequences of this referendum’s result be? It’s at this point that I must point out something that I pointed out in my Daily Pfennig® newsletter, and it all surrounds the thought of when a referendum isn’t a binding referendum. The U.K. Government could very well nullify the referendum’s outcome and say that it is a matter for the Parliament to vote on, and since most of the government was for the U.K. to remain in the EU, one would think that the Parliament would also vote that way. But this is just a possibility, and not a binding thing for the government to do. They might not want to feel the wrath of the people and leave the referendum as is. I’m just pointing out that all this knee-jerk reaction might have been overdone by a large margin, IF the government moves the goalposts.

Prime Minister, Cameron, who supported the remain in the EU vote, announced that he will resign before the October party meeting, and that it will be up to the next PM as to whether he invokes Article 50, which is the actual/official notice that has to be filed to leave the EU.

In addition, this is going to open up Pandora’s Box of countries looking to leave the EU. Among them are France, Sweden, and the Netherlands. These countries will now watch the U.K. to get a gauge of how difficult it is for the economy after leaving the EU. The U.K. Government had run their "don’t leave" campaign with the fear factor of how bad things will be for the U.K. economy if they left the EU. So, now we’re left with “unknowns” of what’s going to happen, who’s going to follow, who’s going to be the PM, and will he invoke Article 50? I learned something many years ago on my first day in the currencies business, and that is, currency markets don’t like "unknowns."

My good friend, and the "retirementor", Dennis Miller of thinks that this will be historical, for he thinks that it’s akin to civil war—the people of the U.K. telling the EU that they don’t want to be ruled by them in Brussels. All I’ve said is that I don’t have a dog in this hunt, as I don’t live there, so I would prefer that we didn’t have this market turmoil.

But we do have this turmoil, and because we have this turmoil, I would think that the Fed will have its hands tied when it comes to hiking rates going forward this year. I originally thought that the Fed would attempt to hike rates one more time before the house-of-cards economy comes crashing down, but now they will have to forego that rate hike, and instead think about the possibility of a rate cut. That’s why I’m always taken aback by dollar strength in times like this. Yes, I know it’s the largest market, and the most liquid, but the market turmoil is something that is going to affect the U.S. economy, and the Fed’s ability to hike rates, and those are two things that should weigh heavily on the dollar. And I haven’t even talked about how badly U.S. stocks reacted to this referendum result.

Janet Changes Her Tune

In April, the U.S. Federal Reserve met and left rates unchanged, and after that rate decision, Fed Chair, Janet Yellen, sounded as if she had lost her puppy, as the economy had yet to respond to all the stimulus the Fed had given it in the past 6-plus years. But then weeks later in May, when the Fed Meeting Minutes printed, the words in the minutes were anything but dovish, and once again the markets thought they were on to the scent of another rate hike, and the Fed members did not disappoint in the weeks afterward.

One by one, the Fed members made speeches that were banging the drum for a rate hike in June. And as I told you in May, with all this rate-hike rhetoric from the Fed members, the dollar rallied. But then along came the May jobs report, which printed the first week of June. And Janet Yellen tried to sugarcoat the awful jobs number, calling it a "one-off jobs report," and that we shouldn’t put too much emphasis on a one-off report.

I then politely, as is my new kinder gentler self, pointed out in my Daily Pfennig® newsletter that this wasn’t a one-off bad report, and that the trend in jobs creation has been going the wrong way. Let’s go back to what I said in the Pfennig on June 7th, "I had to stop and laugh, laugh out loud at that, when I read yesterday, when Janet Yellen said that 'one should never attach too much significance to any single-month report.' And I agree. Don’t I always say 'one swallow doesn’t make a summer?' But come on Janet. This 'one number' regarding the awful jobs print last week only for May? Did they hide from her the fact that the previous two months saw huge downward revisions? (yes, the BLS had to back out some of their 'adjustments' when they didn’t materialize to the tune of 59,000) But if we’re playing along with the BLS, let’s just use the headline numbers from the BLS, and in February job growth was 233,000, March it 186,000, April it was 123,000 and then May 38,000. Me thinks me detects a trend. And if I can see it (my wife contends I can’t see much!) then she can see it, and everyone else can see it. If they just take a step back, and look at the last 4 months, and then add in the last 5 months of the LMCI, they will see that this was not just a 'one month' event. Remember, the trend is your friend, that is, when you realize that it is a trend."

Eventually, Janet came around to seeing the jobs report for what it was, and then the rhetoric about rate hikes stopped. The Fed went cold turkey on the rate-hike rhetoric ahead of the Fed Meeting, and nary has a word been spoken about a rate hike since the meeting didn’t bring about a rate hike. Instead it had Janet, resorting to the lost puppy talk once again.

In fact, the latest Fed speaker to speak, St. Louis Fed President, James Bullard, who is a noted hawk, had this to say about interest rates. It was a bit of a surprise when Bullard said the "U.S. economy may not need more than a single additional rate hike in the next 2.5 years.” I’ll repeat that – Bullard thinks the fed funds interest rate will only be at .63% at the end of 2019. Lower for longer is exactly what he believes. The rate path “is essentially flat over the forecast horizon," Bullard wrote, with growth at around 2%, unemployment around 4.7% and inflation remaining below the Fed’s 2% goal. "On balance, real output growth, the unemployment rate and inflation may be at, or near, mean values that could be sustained over the forecast horizon provided there are no major shocks to the economy."

Then in the 3rd week of June, Janet Yellen made her semi-annual trek to give testimony to the House and Senate on the state of the economy. And here she basically repeated what Bullard has said a week earlier, but added a very important caveat and that is that productivity is slowing. So, the Fed’s new mantra is: Slow growth, slowing productivity and low inflation.

And the dollar had lost ground on a daily basis since these changes in the Fed’s tune have been digested by the markets. Until June 24th. The day the markets went crazy over the results of the Brexit referendum. Shoot, Rudy, even the Japanese yen has been gaining on the dollar in recent trading days! And this is a currency that has no right whatsoever to be rallying against any currency. But now yen’s gains are all tied to the so-called flight to safety.

Gold Moves to the Front of the Class

Gold already had a decent performance going in the month of June, but the Brexit result really lit a fire under the shiny metal, and it zoomed higher by $64 in one overnight session. Is this finally, the big breakout we’ve been waiting for with gold? Or will the price manipulators find a way to whack the price down once again? I want to believe that even the price manipulators don’t want to step out in front of this rally-in-gold bus. But then that’s just me being me, and I could be wrong.

In conclusion this month, a lot of unknowns in the markets right now have the currencies getting sold like funnel cakes at a State Fair, but also has gold soaring. It will take some time for all the dust to settle on this historic event. I would think that battening down the hatches and taking advantage of bargain basement prices in things would be the action to look to take. But be careful out there!

ASSET TRENDS 5/17/2016 – 6/20/2016

Source: Bloomberg World Currency Ranker Screen (WCRS). WCRS asset trends are based on BGN "Bloomberg Generic" indicative or “spot” currency exchange rates and metals prices as of 5 pm Eastern Time on the dates specified. Such rates and prices are generally only available for large volume transactions conducted by institutional investors at a specific point in time. These values are illustrative only and do not reflect interbank rates available to us or the rates or prices we make available to customers at any point in time, and the trend data provided do not include retail exchange spreads or other transaction costs.

Currency1, 2 Trend Change (%)
Australian dollar 2.02%
Brazilian real 3.21%
British pound 1.52%
Canadian dollar 0.98%
Chinese renminbi -0.91%
Columbian peso 1.50%
Czech koruna 0.09%
Danish krone 0.28%
EMU euro 0.25%
Hong Kong dollar 0.03%
Hungarian forint 0.99%
Indian rupee -0.65%
Israeli shekel -1.08%
Japanese yen 4.49%
Mexican peso -1.94%
New Zealand dollar 4.52%
Norwegian krone -0.76%
Polish zloty -0.09%
Russian ruble1 1.22%
Singapore dollar 2.01%
South African rand 5.14%
South Korean won 1.12%
Swedish krona 0.21%
Swiss francs 2.25%
Turkish lira 2.24%
Metals3 Trend Change (%)
Gold 0.55%
Silver 1.63%
Platinum -6.35%
Palladium -6.63%
EverBank CD Baskets1, 2 Trend Change (%)
Balanced Debt® 1.75%
BRICS 1.60%
Commodity BasketSM 3.17%
Euro Trax® 0.44%
European OpportunitySM 0.36%
Geographic BasketSM 0.09%
Global Power Shift® 1.36%
Investor's Opportunity® 0.58%
Mining OpportunitySM 1.30%
New World EnergySM 0.75%
Pacific Advantage® 3.11%
Pan-AsianSM 2.11%
PetrolSM -0.39%
Ultra Resource® 1.46%
Viking® -0.16%
World Energy® 0.94%

EverBank CD Basket trends are also based on WCRS indicative spot rates for the underlying currency mix, which is described at, and thus are not reflective of interbank rates available to us or the rates we make available to customers at any point in time and do not include our spread. For more information, please see

Chuck Butler
Chuck Butler
Managing Director of EverBank Global Markets Group
Chuck Butler
Chuck Butler
Managing Director of EverBank Global Markets Group
You can count on Chuck to tell it like it is. He has over 35 years of experience in the currency field. And he's got a wit all his own. A frequent and respected analyst for various national media outlets, Chuck is also the original author of the popular Daily Pfennig® blog.

Asset trend data are illustrative only and do not reflect retail exchange spreads or other transaction costs.

Along with the potential for market gains, foreign currency accounts carry some additional risks from currency fluctuations, economic and political factors, and accounting differences.

All statements, comments and opinions expressed are solely those of the writer or speaker and are not the statements, comments or opinions of EverBank or of any of its affiliates, and are subject to change without notice. Due to the rapidly changing nature of currency and commodities markets, any statement, comment, or opinion may quickly become outdated. This is not a solicitation for the purchase or sale of any securities or options on securities or for the purchase or sale of a currency or any precious metal, and it does not constitute a recommendation to you or to any specific person of any particular action. EverBank, its officers and employees do not provide investment or other types of advice. All factual information has been obtained from sources that the writer or speaker believed to be reliable, but the accuracy, completeness, and interpretation of the factual information is not guaranteed and has not been independently verified. Not all products are right for everyone. You should conduct your own research and/or consult your advisor before making any purchases.

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