Brexit – Why there’s only one winner in FX markets

<p>There can only be one winner at the EU referendum, it looks the same way in the financial markets.</p>

Only one winner…

There can only be one winner at the EU referendum, now just one week away, it looks the same way in the financial markets. Stocks are weaker this morning and the pound has erased all of yesterday’s gains.

The FX market has been dominated by a jump in the yen this morning, and USDJPY tumbled to its lowest level since 2014. The driver of this move was the Bank of Japan. As expected the BOJ left policy unchanged at its meeting this morning, probably because it knew that it couldn’t protect the yen from the current headwinds in the financial markets. The surge in the yen is dominating the G10 FX space today and adding further downward pressure to the pound, which is approaching a 2-month low versus the US dollar.

Beware currency intervention in the event of Brexit:

The Bank of Japan is unlikely to be happy with a strengthening yen, but it is helpless to stop the market’s stampede to safe havens in the lead up to the EU referendum. But beware the strengthening yen, the BOJ is unlikely to tolerate a stronger currency indefinitely, and if the UK does decide to leave the EU next week then we expect to see the BOJ and possibly the Swiss National Bank intervene to weaken their currencies in the days after the vote.

What’s a trader to do?

This makes currency trading a tricky business as we lead up to the referendum. While a short GBP trade seems like the best way to express a vote for Brexit, it is difficult to know what to short it against. Official intervention in the yen and the Swiss franc could limit gains in these currencies, likewise, the Fed sounded like it is firmly on hold, which could limit dollar upside in the event of Brexit. The euro is out too as the ECB is expanding its stimulus programme and the single currency could also come under pressure if the UK votes to leave the EU.

This leaves gold, the trusty safe haven, which is not controlled by a government or a central bank. The yellow metal jumped above $1,300 an ounce this morning, and is at its highest level for 18 months, proving that it is one of the favourite long trades in the days preceding the referendum.

More EU referendum poll volatility

Looking ahead, there are two EU opinion polls due out later today, one from Ipsos Mori and one from Survation. These polls are likely to have more impact on financial markets than the Bank of England meeting this lunchtime. If these polls show that the Leave camp is maintaining its lead then we could see another wave of panic selling across risky assets.

Why we’re still not at peak volatility

With the actual vote only one week away, it is unlikely that we have reached peak volatility, and we expect to see further market jitters in the coming days. A big shock in the opinion polls, such as a surge in support for the Remain camp, may dramatically alter the fortunes for the pound and other risky assets. Although this seems unlikely based on the polls released in recent days, stranger things have happened, this EU referendum is not a one-way bet just yet.

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