Brexit fears: surging Yen, falling Pound, risk-off, equity market sell-off


The long awaited Brexit volatility is finally here.

Financial markets are clearly getting nervous with the latest polls showing gaining momentum and possibly even a narrow lead for the pro Brexit camp. It is now just 10 days before UK residents go to the polls for what seems will ultimately be a too-close-to-call referendum on staying in or leaving the EU. And markets are not taking any chances.

Here below are some morning notes from a number of leading financial markets analysts.

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Simon Smith, FxPro
Simon Smith, FxPro

Simon Smith, Chief Economist FxPro

Risk Aversion Abounds Once More

All the price action seen during the Asia session has been indicative of markets hunkering down and reducing risk. The yen is gearing up for an attack of the year’s 105.55 low on USDJPY, whilst sterling has continued the weaker tone of Friday, pushing down below the 1.42 level on cable as the Brexit vote moves ever nearer. Meanwhile, the German 10 year bond moves ever closer to the zero level, with many fingers poised over pre-prepared headlines for when it eventually happens. Gold has continued to move higher with only one (marginal) down day over the previous 6 sessions. Spot gold is currently 1.6% away from the high of the year just above the 1300 level. This is not just about the EU referendum next week, but it’s certainly a factor in dampening activity and causing investors to hold back on risk positive trades.

There are lots of central bank meetings this week, but it’s looking ever more naive to expect them to be able to lift the tone in markets. The Fed meeting be a case of parsing the statement for marginal changes in tone, with more interest falling on the BoJ decision Thursday. Given the ever more unconventional nature of policies coming from central banks in general and the BoJ in particular, it’s difficult to envisage just what will be next. This week seems less likely for fresh policy action, not least given the prevailing uncertainties around Brexit which could change the yen outlook in less than 2 weeks.

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Arnaud Masset, Swissquote
Arnaud Masset, Swissquote

Arnaud Masset and Yann Quelenn, market analysts at Swissquote Bank

Equity market sell-off, JPY surges

  • Sell-off in Asia accelerated on Monday as risk-off sentiment spread, weighing heavily on equities, which dropped across the globe but helped gold to recover
  • USD is therefore exposed to significant downside risk amid mounting uncertainties about the ability of the US economy to weather a monetary policy tightening
  • Our view is that financial markets constantly overestimate Fed hawkishness and that there is still some room for some USD weakness
  • AUD/USD, on the upside a resistance can be found at 0.7504, while on the downside a support lies at 0.7315
  • USD/JPY may further weaken as investors seek a safe haven without looking at the true fundamentals
  • We target 100 on medium-term
  • The BoJ meeting will be very closely scrutinized and we should expect a further rate cut and additional stimulus by the central bank.

G10 currencies traded mostly sideways in Asia on Monday ahead of this week’s FOMC meeting. The probability of a rate hike has significantly decreased since the last jobs report and is now close to zero (chance of a move hit 1.1% this morning – extracted from OIS swap). The market will however pay particular attention to the tone and words used in the press conference as well as to the dot plot evolution. The USD is therefore exposed to significant downside risk amid mounting uncertainties about the ability of the US economy to weather a monetary policy tightening.

The risk off environment is also weighing heavily on equities, which dropped across the globe but helped gold to recover. The S&P 500 slid more than 1% last week, the Euro Stoxx 600 fell 4.10% and the SMI was off 3.60%. The sell-off accelerated in Asia on Monday with the spread of risk-off sentiment. In Japan, the Nikkei was off 3.51% and the broader Topix index slid 3.47%. In mainland China, the CSI 300 was down 1.45%. Offshore, Hong Kong’s Hang Seng fell 2.74%, while Taiwan’s Taiex eased 2.05% to 8,536 points. The yellow metal has been finding a decent amount of buyers since the beginning of the month as investors seek out an alternative to equities. Gold jumped 0.64% in Tokyo to $1,282.10, the highest level since May 16th. In Europe, equity futures are blinking red, signalling a lower open.

In China, the latest batch of economic data painted a mixed picture of the world’s second largest economy with May industrial production printing in line (6%y/y) and May retail sales easing to 10%y/y from 10.1% in the previous month. Finally, fixed investment missed the median forecast and printed at 9.6% (year-to-date), versus an expected 10.5%. As usual, Chinese turmoil is putting its main trade partners, such as Australia, at risk. AUD/USD hit 0.7659 in the early Asian session before bouncing back to 0.7395 as the USD falters. On the upside, a resistance can be found at 0.7504, while on the downside a support lies at 0.7315 (low from June 6th).

USD/JPY was the biggest loser this morning with a drop of roughly 1% as investors sought safe haven assets. With constant upside pressure on the JPY, we believe that the BoJ will not wait long before moving from words to action and increase its stimulus. On the downside, a support can be found at 105.55 (low from May 3rd), while on the upside a first resistance area can be found at around 107.

Yann Quelenn, market analyst: “Tough times for Japan: Japan has definitely not started the week on a good note. The Nikkei closed down 3.5% early this morning and the USD/JPY is on its lowest level since October 2014, trading around 106 yen for one dollar note. All eyes will now be on the BoJ meeting and we should expect a further rate cut and additional stimulus by the central bank.

Our view is that financial markets constantly overestimate the Fed’s hawkishness and that there is still some room for some USD weakness. Moreover, the Fed is driving the risk-off sentiment, which increases upside pressures on the yen. Investors are not even looking at the true fundamentals of the Japanese economy and are ready to lose -0.10%. Political stability is what is being looked for. In this era of negative interest rates and very low returns, we believe that the rationale of investment has changed and there is now more of a priority to preserve capital than to make it appreciate. Our medium-term view on the USDJPY has not changed and we target 100.”

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Ana Thaker, PhillipCapital
Ana Thaker, PhillipCapital

Ana Thaker, Market Economist at PhillipCapital UK

Risk-off sentiment continues

Markets prepare for the week ahead with a deluge of data and central bank announcements due. The star of the show will no doubt be the FOMC meeting conclusions on Thursday where markets have written off the prospect of a rate hike. We see currency markets open fairly tentatively this week as they await major data releases with none scheduled today but the first being UK CPI figures out tomorrow.

Chinese figures overnight were mixed; Industrial production remained unchanged at 6.0% but better than expected and retail sales dipped a touch to 10.0%. Markets took the news well with the Australian dollar a touch higher. Whilst the data from China is not strong, it shows that the economy is moving in the right direction of steady growth. The retail sales dip may be a cause of concern for the government who desire consumer driven growth, however, the figures are not weak enough to warrant action from the government of PBoC.

We have seen the Yen strengthen to 105 against the US dollar, a result of the risk-off environment as we enter a week of uncertainty. The Yen continues to be a safe haven for markets that face indecision from the FOMC and Brexit vote next week. The Bank of Japan meet later this week and intervention is on the cards to reduce the strength of the Yen that hinders inflation in the country. Talks in the G7 were generally against currency manipulation tactics but as uncertainty in the markets persists, the Bank of Japan may have no choice but to engage in easing measures.

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Brexit fears: surging Yen, falling Pound, risk-off, equity market sell-off

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