Forex Market News | Monday 13th June, 2016
The risk that the UK votes to leave the European Union next week is the dominant force driving FX and other capital markets this week. A report late in the NY session last Friday that the “exit” vote pulled ahead of the “remain” vote saw the GBP/USD drop close to 1.5% going into the weekend and it’s down about .5% to start the new week. It’s worth noting that the pair traded as high as 1.4620 a week ago and is now nearing 1.4100.
Up until last week, the “Brexit” impact on the market had been largely contained to the Sterling. However, as bookmakers in the UK tightened the odds on the exit wager, investors are starting to fear that what was once a long-shot exercise in self determination could turn into a flood of uncertainty which could lead to a much wider fracture of the European Union and challenge to order of global capital markets.
This has triggered a wave of “risk off” across capital markets with the Shanghai Composite down 3.2% and the Nikkei 225 posting its biggest loss in over two months at over 3.5%.
In keeping with the “risk off” theme, G-7 bond yields saw the biggest weekly fall in over four years with the 10-yr German Bund losing over 30 basis points and the UK 10’s losing close to 20 basis points…..both falling to historical lows or .03% and 1.22%, respectively.
With the market’s attention shifting to the uncertainty of how UK voters will cast their ballots, it’s easy to overlook that their are four Central bank meetings this week. Of those four, only the FOMC and BoJ meetings are expected to have any potential to impact the FX market: Both the BoE and SNB aren’t expected to move based on the proximity to the aforementioned UK referendum.
With respect to the FOMC meeting, it’s likely that the decision to hold rate will have less impact than the forecast and trajectory of the Dot Plots. If the FED Governors hold the line with two rate adjustments before the end of 2016, the result will be USD neutral. The BoJ concludes their meeting on Thursday and could respond to recent ¥en strength with stronger language but any material change in QQE of a new fiscal stimulus plan is not really priced into the USD/JPY at current levels.
On balance, we observed that last week’s recovery in the USD coincided with the rally in bonds. Foreign demand for US debt looks to be increasing as European and Japanese yields move further into negative territory and UK yields fell to new record lows. We consider the fact that foreign investors are drawn to US paper as a logical response and a bullish factor for the USD, in general.
As such, Synergy FX still prefers the short side of the EUR/USD and maintain our initial target of 1.1080. We suggest Short-term traders can look to sell the pair up to 1.1320 and work a 1.1390 stop, if filled.
With no new policy measures expected from the BoJ and the Nikkei under pressure, it’s difficult to see a clear source of upside potential over the next few sessions. Our suggestion to buy USD/JPY last Friday was stopped out today at 106.10. We suggest staying on the sideline until after the BoJ meeting on Thursday.
The Australian Jobs report on Thursday is the highlight of the data schedule down under. A softer headline number and higher unemployment rate of 5.9% are the consensus forecast. Technically, the .7430 level offers initial resistance; which was our sell level from last week. We suggest short -term traders look to sell AUD/USD at .7430 with an initial target of .7280 with a .7475 stop.
The GBP/USD continues to trade in a choppy, rumor driven pattern in front of next week’s vote. With most FX providers raising initial margins on the Sterling and Sterling crosses, Synergy suggests staying on the sideline.