21 October 2016
Following the Brexit vote, the euro is likely to remain weak in the near term despite intermittent rebounds. Photo: Bloomberg
Following the Brexit vote, the euro is likely to remain weak in the near term despite intermittent rebounds. Photo: Bloomberg

Currency markets face further volatility after Brexit

Sterling and euro plunged after the stunning Brexit vote. As investors fretted about political and economic uncertainties in Europe, capital flowed into perceived safe-havens like the US dollar, Japanese yen and gold.

More than 3.5 million Britons have now signed an online petition calling for a re-run of the EU referendum after last week’s vote.

Under the current rule, the British parliament must consider all petitions that reach a threshold of 100,000 votes. But the parliament has no legal responsibility to do so. Therefore, a fresh vote is unlikely to take place.

Prime Minister David Cameron has ruled out a second referendum. Instead, he has assigned a special government unit to draw up options for Britain’s renegotiation with the European Union.

The Brexit vote, meanwhile, may trigger a domino effect in the EU.

France’s far-right National Front has already called for a referendum on French membership of the EU. The National Front has always wanted France to leave the EU, and the party has performed well in recent election.

Investors fear that UK’s decision to exit the EU could cause far-reaching economic and political shocks. On June 24, the euro tumbled more than 3 percent against the US dollar to a low of 1.0909.

The European unit is likely to remain weak in the short and medium term despite intermittent rebounds. The 250-day moving average of 1.11 could be a resistance level for the short term. Meanwhile, the unit may face downside to 1.09 or even 1.082.

Standard & Poor’s has lowered the UK’s sovereign credit rating to “AA” from “AAA”, citing potential economic damage from the Brexit vote. Fitch, meanwhile, cut its rating on the country to “AA” from “AA+”. 

Sterling bounced slightly on Tuesday after plummeting to a 31-year low of 1.3118. The unit edged up to 1.33 against the US dollar. The unexpected outcome of the Brexit vote has led to heavy sell-off for the British currency on June 24, when it suffered the biggest one-day slide on record.

The trade weighted exchange rate index of British unit was down nearly 9 percent within two days after the referendum, reflecting weakness against a basket of major currencies.

However, there is limited downside for the unit in the near term. It has good support at 1.3 but faces resistance at 1.338 to 1.35 level on the upside.

The US Federal Reserve may raise interest rates only once at the most this year given the market turmoil caused by Brexit. The hike may come after the Fed meeting in September or December.

Japanese yen has enjoyed a good rally as a defensive play. The greenback once dropped to 99.08 against the yen last week but returned to 102. It’s rumored that Bank of Japan (BoJ) might intervene if the local currency falls below the benchmark level of 100 against the dollar.

The central bank called an urgent meeting on Monday for a discussion on stemming further yen appreciation. That could be a prelude to intervention from the BoJ in the near future.

The market will keep a close eye on a manufacturing report from Japan. BoJ may expand economic stimulus further if the report points to deteriorating economic growth and deflation risk. If that happens, it could weigh on the yen.

Technical chart shows the US dollar has steadied at 103.5 against yen early last week, but failed to defend that level on June 24. It’s possible that the dollar will regain strength until it returns above 108. If not, it may ease further to 99 or 100.

This article appeared in the Hong Kong Economic Journal on June 29.

Translation by Julie Zhu

[Chinese version 中文版]

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Sales director, Emperor Capital Group Limited; HKEJ columnist

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