Asia week ahead: UK’s EU referendum comes to a head

The Brexit storm is gathering force as we head into the UK vote regarding its membership in the European Union (EU) this Thursday.

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Source: Bloomberg

The polling will open at 7am (2pm SGT) in the UK morning until 10pm in the evening. The counting will begin thereafter, and we may hear about the exit polls between 7.30am and 2pm SGT on Friday, 24 June. The official announcement will likely be around that time or later.

The Brexit debate has been dominating the financial markets since last year, with a bitter campaign waged between the ‘Leave’ and ‘Remain’ camps. This has caused great volatility in the GBP, which depreciated -5.4% against the USD in 2015. The pound fell nearly 6% to below 1.40 in late February, hitting the lowest since the Global Financial Crisis.

For the moment, it is still a tight race between the two camps, with the ‘Leave’ group gaining the upper hand recently. IG’s EU Referendum Barometer, which indicates what traders are expecting next Thursday, showed a 58% chance Britain will vote to stay. But the odds of leaving has risen to an all-time high of 42%. The GBP has been extremely sensitive to polls, and the latest swing to Brexit triggered a renewed selling in the sterling pairs.

A number of central banks has expressed concerns about the implication of the vote. The FOMC left rates unchanged on Thursday, with chair Janet Yellen acknowledging that Brexit was one of the factors for the decision. The Swiss National Bank also warned that it will intervene in the foreign exchange markets to curb the swiss franc strength as needed, after maintaining monetary policy.

Meanwhile, the governor of the Bank of Thailand said we could see renewed market volatility on the Brexit vote. The Bank of England reiterated the risks of Brexit after its June policy meeting, highlighting that the adverse impact would include a weaker demand and supply, and a fall in GBP. Moreover, a leave vote will materially change the UK economic outlook as well as the monetary policy stance.

For the rest of the world, it is not just the fate of the UK economy that concerns them, but the broader impact on the EU. Would we see more referendums on EU memberships from disillusioned members? Would a Brexit situation has greater implications for the EU than the UK? This uncertainty is what keeps investors awake at night, at least until the vote takes place.

As a result, global markets are going to be nervous in the coming week. They are probably not going to pay much attention to other data or events. Although, we should never disregard other developments.

In particular, Fed chair Janet Yellen will give her semi-annual testimony on monetary policy to the Congress. This could have some bearing on the USD, while the Philippine and Thailand central banks will hold their policy meetings, where both are expected to do nothing. US data will also be of interest, with home sales, durable goods orders, and initial jobless claims on the tap. Asia will be quite quiet in way of data. Singapore will report its inflation and industrial production numbers.

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