The moment of truth is about to be revealed. After weeks of analyzing voting polls and volatile markets, in couple of days we’ll get to know the outcome of UK’s referendum on EU membership when Britons head into polls on Thursday. A divorce will come at a price, in fact an expensive one, not only for UK but for the global economy where central banks tried so hard to pull it from one of the most severe economic crisis. Although it’s still not clear for many on what long-term consequences a leave vote would have on UK’s economy or the future of the EU as a whole, markets will push the sell button first and then ask questions.
Sterling rallied on Friday after the catastrophic murder of Jo Cox, a Labour Party politician and remain supporter increased speculation that her death would influence the undecided Britons to join the remain campaign on Thursday. Whether this is true or not, it remains an assumption, and volatility across all asset classes will continue to be elevated as many traders will sit on the sidelines, causing liquidity to dry, thus creating some wild price swings. Of course the pound will be hit hardest if a leave vote wins on Friday, and a 10% decline from Fridays close is very realistic, however do not underestimate the effect on the Euro which could be the second most impacted by a Brexit. If Britons decided to stay, the exact opposite scenario will occur, higher pound and euro, but not to the same extent of a leave.
No doubt the Yen is the most lovable currency in such conditions, and USDJPY already dropped to 22-month low on Thursday after BoJ stood pat on monetary policy. Most traders are probably asking if the 100 level is next. The Yen has dropped almost 400 pips in April 28 when BoJ challenged markets expectations and held tight on stimulus plan. In short USDJPY has the potential to move towards 100 and even lower as markets go into flight-to-safety mode. It will remain to be seen how serious Japan’s officials are in terms of intervening to weaken the currency. I guess this time Japan will do so because most factors impacting their currency are external, and its clearly unwinding all efforts taken from the monetary and fiscal side to stimulate growth.
Fed chair Janet Yellen testifies to Congress on Tuesday, less than a week after the Fed pared back growth forecast and interest rates expectations for 2017 and 2018. Probably she doesn’t have a lot to add on monetary policy after last week’s Fed dovish stance, but I expect her to be slightly upbeat to re-manage markets expectations which has become too skeptical towards Fed tightening. In fact, speculators are not only pricing no rate hike for 2016, but some come to believe the central bank will cut rates later in the year. On the data side, existing & new home sales and durable goods are key U.S. releases the week ahead.
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