Pound Stung by Brexit Jitters, Aussie Dollar Mulls Budget Update

The Yen outperformed in overnight trade as Japan’s benchmark Nikkei 225 stock index declined, fueling demand for the go-to anti-risk currency. The New Zealand Dollar likewise traded higher, buoyed by a raft of supportive economic data releases.

The Australian Dollar faced early selling pressure – a move the newswires attributed to geopolitical jitters after China seized a US underwater drone over the weekend – but managed to reclaim some lost ground after the government lowered its budget deficit forecast for this year while pledging a surplus by 2021.

Treasurer Scott Morrison said the budget shortfall will be A$36.5 billion in the 2017 fiscal year, down from A$37.1 billion predicted in May. Perhaps most interestingly, the pledge to close the gap by 2021 remained from the prior outlook even as the forecast for growth was lowered.

Moody’s, a leading ratings firm, applauded the announcement, saying Australia shows a continued commitment to fiscal consolidation and adding that the country’s metrics are in line with other “Aaa” sovereigns. Worries about a possible loss of the top credit rating have swirled since mid-year.

The British Pound declined after Scottish First Minister Nicola Sturgeon told the Financial Times that another referendum on seceding from the UK will be held if her country is unable to remain within the EU single market following Brexit. “Full [EU membership] as an independent state” is best for Scotland, she said.

Looking ahead, the Euro may not find a great deal of lasting support from an expected uptick in German business confidence. The IFO survey is expected to put sentiment at the highest level since April 2014 but the outcome may be mostly overlooked considering its limited implications for near-term ECB policy.

More broadly, the onset of the pre-holiday liquidity drain may put pressure on the US Dollar. As noted in our weekly forecast, the greenback may retreat from a 14-year high amid profit-taking spurred by the absence of news flow offering specifics to inform the now-ubiquitous “Trump trade” narrative.

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