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Article / 13 June 2016 at 8:10 GMT

FX Update: Brexit contagion fears spreading to all assets

Head of FX Strategy / Saxo Bank
  • GBP dives as Brexit contagion fear spreads to EUR
  • Sterling volatility spiking to "remarkable levels"
  • GBPJPY hits fresh cycle lows as yen proves safe-haven currency of choice
  • This week's FOMC looking like something of an irrelevance


The Brexit vote on June 23 is dominating markets entirely. Photo: iStock

By John Hardy

It’s a long nervous wait into the June 23 referendum, aggravated by an ORB poll on Friday showing the highest odds yet that the UK will vote to leave the European Union.

Risk appetite joined the pound in going into a tailspin, with the contagion spreading to asset markets around the world. At the epicenter of the move was the usual Japanese yen suspect, with the US dollar and Swiss franc also garnering a lower beta bid on the systemic risk off as well. 

While the pound was the weakest currency, we’re finally seeing some more contagion into the euro, with the recent, steep EURCHF slide the clearest sign of this, while EURJPY also slipped to its lowest level since early 2013, before Bank of Japan governor Hiruhiko Kuroda even announced the BoJ’s new QQE programme. 

This week’s US Federal Open Market Committee meeting would normally loom rather large, but as it comes the week before the UK referendum, its potential to impact the market should prove minimal and fleeting. What can the Fed possibly say that retracts the embarrassing series of guidance missteps this year?

Expect something muted and hopeful, but entirely data dependent. Winning back some credibility could start with the Fed admitting the futility of the dot plot rate forecasts and scrapping it entirely, as St Louis Fed president James Bullard has argued.

Likewise, the Bank of England’s message will be to subtly peddle the message that it is safer to vote to stay by underlining the ongoing drag the Brexit issue is having on the economy and risks to the economy post a Brexit-vote.

Sterling volatility has spiked to remarkable levels, underlining the difficulty and risk of speculating around the event itself, particularly as volatility to the degree suggested by the market (nearly 40% for the 2-week vs. 14% around the Scottish referendum and never worse than 32% during the global financial crisis) might point to central bank intervening to smoothe the market during the hours after a possible Brexit vote.

It’s less expensive for Brexit sceptics to speculate on a Remain vote, due to the options skew, but traders may be best served by standing aside and keeping powder dry for trading the reaction.

GBPJPY slides

GBPJPY and EURJPY slipping to new lows for the cycle early this week as the UK referendum nears next week. There is little in the way of technical waypoints down here, but the 61.8% Fibonacci retracement is fast approaching down near 147.00.

GBPJPY at new lows for the cycle
 Source: SaxoTraderGO

The G-10 rundown

USD – The greenback is not serving as the prime safe-haven currency at the moment, but should remain a relatively safe harbour from the Brexit fears as at some point, the BoJ/MoF in Japan rattles their sabre on the yen.

EUR – Brexit contagion into the euro pairs is finally becoming more evident in EURJPY since Friday’s UK poll, and traders may look to fade EURUSD on bounces as well.

JPY – Playing its usual role as the anti-risk currency, with more volatility possible on a break of the 105.50 area lows.

GBP – at the epicenter of the risk off and will remain dangerous and erratic (on polling results) until the other side of the June 23 vote.

CHF – Clearly garnering a safe-haven bid and we have a Swiss National Bank meeting later this week that is awkwardly timed ahead of the UK referendum vote, so we may have the SNB trying to talk up its ability to counter pressure on the currency around that event.

AUD – Some risk-off effects were evident late last week, but it is finding some support overnight, and perhaps avoiding the worst of the normal correlation with risk appetite as the focus is elsewhere. 

CAD – Negative impact on CAD from a weak oil price outweighing Friday’s very positive (and possibly misleading, given the volatility of the series) jobs report. Bulls need a run to 1.3000+ to reinvigorate the upside prospects for USDCAD.

NZD – the kiwi is remarkably resilient, given the risk-off tone, but another extension of risk-off akin to the likes we have seen already might begin to weigh more forcefully on less liquid currencies like NZD.

SEK – The krona is oddly sensitive to the latest developments, perhaps on the idea that its export sector is so leveraged to Europe’s economy on top of its negative correlation with risk. Risk towards 9.50/60 if the 9.38 range high can’t corral the action.

NOK – NOK less impacted by the risk off than SEK and a bit more immune to the steep crude oil selloff than one might normally expect. The feared Brexit impact on euro may be countering the negative effects on NOK and keeping EURNOK rangebound.

— Edited by Martin O'Rourke

John J Hardy is head of forex strategy at Saxo Bank
13 June
John Roberti John Roberti
Dear John, Friday you indicated that, most probably, if USDCAD would close above 1,2725, it would indicate a probability of bullish for the week. It closed on 1,2770 and is still there now! USDCAD is fairly correlated to Oil and this Sunday Ole Hansen indicated that the volume of short on oil WTI has increased significantly last week and recall the increase in rigs in the us for the second week. I have to add the resumption of oil production in Canada as well as the probability to witness a second small increase in US production on Wednesday; thus oil should probably continue to come down to at least 47USD/barrel. What is your view on the dollar this week and do you see a strengthening of the dollar to help a decline in CAD? In this message here you now say that 1,30 would be required to push usdcad higher? Your opinion would be appreciated


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