Under the spell of Brexit referendum - Commerzbank

The upcoming Brexit referendum is dominating FX markets. According to Thu Lan Nguyen, analyst at Commerzbank, should the majority of the British electorate vote in favour of the UK leaving the EU, this should spur market volatility and JPY should be in high demand as a safe haven.

Key Quotes

“FX markets are under the spell of the Brexit referendum next week. After all, the probability that the British will vote for the UK to leave the EU has risen significantly according to the latest opinion polls. Classic safe currency havens such as the Swiss franc, the Japanese yen and the US dollar are profiting from the high uncertainty while sterling is still under pressure. The trend of the past few days is only a taste of things to come in terms of exchange rate movements in the case of a Brexit vote though, or at least this is what higher risk premiums on exchange rate movements on options markets suggest. Besides a sharp depreciation of sterling, investors are, for example, increasingly betting on a strong appreciation of the US dollar versus the euro.”

“That said, the currency likely to appreciate most in the short term in the event of a Brexit is the yen. The Swiss National Bank has already announced it would intervene in the currency market if the franc sharply appreciated. And in the US, speculation that the Fed will soon hike interest rates would likely fall significantly in the case of a Brexit, and hence limit the upside potential of the US dollar. The Japanese central bank on the other hand has no credible means to prevent JPY appreciation. Although Japanese officials have signalled that the government will act against “sudden, speculative” exchange rate movements, without the agreement of its G7 partners it will not readily intervene on the currency market and this agreement should be hard to obtain. Already at the last meeting, the US gave the Japanese government a clear no to intervention.”

“We would not entirely rule out the possibility that central banks intervene even jointly on FX markets in the case of excessive exchange rate fluctuations. This is only likely to happen though if they reach the conclusion that distortions on the FX markets threaten the stability of the financial markets.”