USD/JPY surges to test key level ahead of EU referendum outcome
James Chen, CMT June 23, 2016 11:10 AM
As markets across the globe early on Referendum Thursday continued to reflect strong conviction that the majority of Britons would vote to remain in the European Union, USD/JPY tentatively surged above key resistance around the 105.50 level before paring some of its gains. This sharp rise was primarily due to substantial weakening of the yen, as bets that a Remain outcome would prevail prompted a considerable shift away from the safe haven Japanese currency. This shift occurred as the "risk-on" environment that began this week continued to prompt buying of riskier assets and a sell-off in assets that have traditionally been considered safe havens, like the yen and gold.
Of course, this market reaction is based purely upon speculation in advance of the actual outcome that the UK will ultimately opt to remain in the EU. Naturally, the market’s leaning towards a Remain outcome will either be confirmed or refuted by the actual results of the referendum, which should be known by Friday morning. As the contest has continued to be extremely tight, at least according to the pre-vote polling up to the day of the referendum, the risk of a Brexit still remains present despite the markets’ apparent conclusion that the UK will vote to stay in the EU.
The outcome of the vote may affect USD/JPY in a few ways. Aside from the noted impact on the yen in its role as a safe haven currency, the US dollar could also be affected in a more indirect way. A Remain outcome would likely provide the Federal Reserve with much more breathing room to potentially implement a near-future rate hike, provided that US employment data stages a strong reversal after last month’s very disappointing jobs numbers. This possibility could boost the US dollar, which could further lift USD/JPY in conjunction with a shift away from the yen safe haven. In the event of a Leave outcome, the potentially resulting market turmoil could help to preclude a near-term Fed rate hike, thereby pressuring the dollar and prompting a further dive for USD/JPY in conjunction with a safety flight to the yen.
Overall, USD/JPY remains entrenched in a strong downtrend, as the yen has continued to strengthen against the dollar despite Japan’s wishes to push its currency lower. Just last week, the Bank of Japan opted to keep its monetary policy unchanged and not stand in the way of yen strength ahead of the UK’s EU referendum. In the event of a Leave outcome and a resulting yen surge, however, a currency intervention could potentially occur at any time.
From a technical perspective, as noted, Thursday saw a tentative rise for USD/JPY above the key 105.50 resistance area before it pared some of its gains. This level served as prior support from the low in early May, which was broken down just last week. If the UK votes to Remain, taking risk off the table for the time being and helping to provide the Fed with more impetus to raise interest rates, USD/JPY could see a significantly further relief rally above the 105.50 level towards its next major resistance targets at 108.00 and then 111.00. In the event of a surprise Leave outcome, however, the currency pair could continue its strong bearish trend towards 103.00 and the key 100.00 mark, in which case a Japanese yen intervention could become increasingly likely.
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.