Brexit & Oil Dominated The Currency Market

The risk off mood of the markets sent the Japanese yen soaring as oil prices remain the central focus having its effects on commodities, equities and currencies. U.S. stocks were falling sharply for a second day on Wednesday, dragged lower once again by a tumble in commodity prices, most notably oil. The dollar fell to 111.17 yen from 111.97 yen in the previous day’s trading. The euro rose to $1.1037 from $1.1018. The Japanese yen approached the highest level against the dollar this year and reached the strongest level versus the euro in nearly three years

The yen benefited from lower oil and stock prices. Other haven markets—U.S. government bonds and gold—also strengthened Wednesday. Commodities-linked currencies such as the Russian ruble, Brazil’s real and South African’s rand all fell against the dollar and the yen.

Turning away from oil the EURGBP is the currency pair of interest today as the other big headline remains the possibility of the UK leaving the Eurozone. As the UK is nearing its second major political referendum in less than two years, the Brexit debate has rendered financial market participant nervous, and Canary Wharf is seeing rife volatility, with the pound’s devaluation and capital outflows expected soon.

Heated debate over the UK’s possible exit from the EU in June has badly shaken the performance of the British shares and currency markets, with the pound sterling (GBP) having dropped below $1.40 on Wednesday, compared to its past year’s normal trading gauge of $1.42-$1.60.

The UK’s sterling might extend its losses against the greenback and fall to as low as $1.35 in a week from now, as concerns over financial stability of Canary Wharf in the fragile political environment are fending investors off the City of London.

Devaluation of the sterling, triggered by Brexit speculation and the expectation of the referendum set for 23 June, might turn out to be sharper and deeper than initially projected. According to consensus estimate, the GBP might drop to $1.35 within a week, its lowest since 1985, hardly recovering losses until the referendum.

Should the UK vote ‘Out’, the pound might drop even further, to as low as $1.20, falling in line with January’s projections of Deutsche Bank, estimating the sterling’s FX rate at $1.27 by the end of 2016.

Should Britain leave the EU, the BoE might even cut interest rates back to zero, resulting in an even greater investment outflow than that in case the rate remains at least unchanged. Currently, the UK economy is nearing the point where a hike in borrowing costs would be desirable, staving off bubbles in financial sector. Perhaps, the Brexit debate will now help cool the financial sector even without a raise in borrowing costs.

Traders say a weak growth outlook may weight on the euro. A report Tuesday showing a decline in business confidence in Germany raised concern over the momentum in the Eurozone’s biggest economy.

Analysts say this bolstered the possibility of fresh monetary stimulus from the European Central Bank when policy makers meet to set rate policy in March.

Ultra-loose monetary policy—many are tantamount to print more money—shrinks the value of a currency. The divergent paths of interest rate policy has sent the value of the dollar soaring since the summer of 2014. The Federal Reserve has been the only major central bank raising interest rates, which increases the appeal of the dollar.

The greenback’s strength has failed to gain more traction so far this year as uncertain global growth outlook has made Fed officials more cautious in raising rates. The hesitance has driven investors to lighten up bullish bets on the dollar.