Global markets were on edge on Friday after digesting the unexpected outcome of Thursday’s Brexit vote with $2 trillion being wiped away from global markets, crude oil declining 5 percent, and the British Sterling losing 10 percent of its value at one point in trading as investors flocked to the safety of assets such as gold, the Japanese yen, and the U.S. dollar.
Central bankers in Japan, the U.K., and the U.S. will be in the spotlight this week as they seek to confront the fallout of major currency flows on Friday that will most certainly impact their own economies.
After the yen rose on Friday to as much as ¥ 99.00 against the dollar, the strongest level since November 2013, the Bank of Japan is now under increasing pressure to adjust its monetary policy that could lead to some type of expansion of its ¥ 80 trillion asset purchase program or driving its prime interest rate further into negative territory.
Japan needs a weaker yen to help support their export driven economy.
A strong yen makes it more expensive to purchase Japanese products such as cars.
Bank of England
Bank of England Governor Mark Carney attended a central bankers governors’ meeting in Basel, Switzerland over the week-end to discuss the fallout of June 23rd’s Brexit vote.
Governor Carney is not expected to attend a central bank summit in Portugal later this week.
Last Friday Governor Carney released a statement that acknowledged there will be a period of uncertainty and adjustment following the Brexit result and admitted it will take some time for the United Kingdom to establish new relationships with Europe and the rest of the world.
Governor Carney indicated that as a backstop, to support the functioning of the markets, the Bank of England stands ready to provide more than £250 billion ($336 billion) of additional funds through its normal facilities and is able to provide substantial liquidity in foreign currency, if required.
“We expect institutions to draw on this funding if and when appropriate, just as we expect them to draw on their own resources as needed in order to provide credit, to support markets and to supply other financial services to the real economy” Carney stated.
London’s large financial center is expected to face some new changes and eventual layoffs as Britain shifts away from the EU.
According to a recent opinion poll from the U.K.’s Sunday Post, 60 percent of Scots are now in support of Scottish independence.
On Saturday Scottish First Minister Nicola Sturgeon said that a new independence referendum is a possibility since the majority of Scots want to remain in the EU.
U.S. Federal Reserve
Last Friday there was no monetary policy talk from Federal Reserve Chair Janet Yellen following the Brexit vote although during her testimony before Congress last week she maintained the Fed’s monetary policy “isn’t on a preset course” and remains accommodative while acknowledging that a Brexit vote to leave the EU could have significant economic repercussions.
As a result of the Brexit vote, a September interest rate hike is likely to be shelved but the possibility of an interest rate hike in December is still not ruled out unless officials from the Federal Reserve communicate otherwise.
The flight to the U.S. dollar on Friday amid concerns over Britain and the EU will have implications on U.S. businesses with global exposure.
Written by: Johnathan Schweitzer