Pressure builds on RMB after Brexit

Added 24th June 2016

China's yuan as well as regional currencies are likely to see selling pressure, according to analysts who opined on the outcome of today's vote.

Pressure builds on RMB after Brexit

“We see depreciation pressure in the Renminbi following the sharp fall in sterling,” Shanghai-based Chaoping Zhu, China economist at UOB Kay Hian Investment Consulting told FSA.

“The direct impact on China is more about the investment sentiment."

RMB bonds would be affected by any currency drop because they would become less attractive, and capital may flow into safehaven assets such as gold, Zhu added.

In terms of equities, Irene Chow, senior Hong Kong and China equity analyst at Bank Julius Baer, told FSA that Hong Kong equities have more selling pressure when compared to the Chinese equities in a knee-jerk response to the Brexit news.

As the Hong Kong market is more liquid, Chow expects further selling pressure is likely in the near term. The Hang Seng Index was down 4.4%, and the Shanghai Composite Index was down 1.0%.

"It is reasonable to assume that the UK will quickly enter a period of economic recession"

In the UK, sentiment was clearly sour. Richard Buxton, UK equities manager and CEO of Old Mutual Global Investors, offered a dire forecast.

"[I]t is reasonable to assume that the UK will quickly enter a period of economic recession, the key reason why we believed the outcome would be different from what has materialised today. It is, in effect, likely to be the first ever “DIY recession”, as George Osborne prophetically called it.

"It is difficult to say at this stage what action the Bank of England may take, but it is not impossible to imagine that it may quickly cut interest rates. Restarting the programme of quantitative easing – a feature that has been absent from the economic landscape for some three years now – also looks a possibility. At the very least, the central bank is likely to indicate its preparedness to take such action."

Michael Metcalfe, head of global macro strategy, State Street Global Markets, warned that outflows from UK equities and gilts may be coming because in the three months before the vote, "international investors increased their holdings of UK equities and gilts in spite of the uncertainties created by the vote".

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