USD/JPY – Yen Gains as Brexit Vote Stuns Markets

USD/JPY has posted strong losses on Friday, following the stunning news that the UK had voted to leave the European Union. The yen briefly dropped below the symbolic 100 level earlier on Friday. British Prime Minister David Cameron has vowed to respect the outcome of the vote and also announced his intention to resign in the next few months. On the release front, there are two key US events on the schedule – Core Durable Goods Orders and UoM Consumer Sentiment. In Japan, the Services Producers Price Index posted a small gain of 0.2%, which was within expectations.

Shocking, extraordinary, a political earthquake. There are shock waves in the UK and across Europe, following a stunning decision by the UK to exit the European Union. Polls leading up the race had showed a very tight race, while the financial markets expecting the Remain camp to win. This was evidenced by the British pound moving higher throughout the week. At the end, the Leave camp won the day, garnering 52% of the vote. The markets have reacted sharply on Friday, with the pound plunging to 30-year lows and the euro dropping 2.2%. The markets were volatile throughout Thursday night, and we could see further volatility in the currency and financial markets during the Friday session. It’s hard to gauge the extent of the economic fallout so soon after the vote, but there’s no doubt that the UK and the European Union are entering into uncharted territory and a period of instability and uncertainty. The dramatic and unexpected decision to leave the EU will undoubtedly have unpredictable economic and political consequences, perhaps for years to come. The UK economy of GBP 2.9 trillion is the fifth largest in the world and number two in Europe, after Germany. Will the EU survive Brexit? There is clearly shock and dismay across the European Union that the club is losing such an important member, and the vote to leave is likely to boost separatist causes in Europe that seek independence, such as Scotland and Catalonia. As for the financial markets, safe-risk assets are the big winners immediately after the vote. Gold has jumped as much as 7.5 percent on Friday, and the Japanese yen has gained 2.2 percent.

Overshadowed by the Brexit referendum campaign was testimony from Janet Yellen before Congress earlier this week. Yellen was cautious and tentative, and failed to provide any hints about the timing of a rate hike. She acknowledged that the US economy could be stronger, saying that “[c]onsiderable uncertainty about the economic outlook remains”. Yellen said that she’s “hopeful that we will see a pickup in growth”, but skeptics might respond that the markets want to see action from the Fed and not just hope. The Fed has clearly been out of sync with the markets, as underscored by the Fed’s statements back in December that it might raise rates in 2016 up to four times. Meanwhile, here we are in June, and there’s no clear indication that the Fed will raise rates at all this year. In her testimony, Yellen said she does not expect the US economy to enter a recession, but if such a scenario did occur, the US would not follow Japan and Europe and adopt negative interest rates. On a more positive note, Yellen said that weak oil prices, low interest rates and stronger wage growth should support consumer spending.

USD/JPY Fundamentals

Thursday (June 23)

  • 19:50 Japanese BoJ Summary of Opinions
  • 19:50 Japanese SPPI. Estimate 0.1%. Actual 0.2%

Upcoming Key Events

Friday (June 24)

  • 8:30 US Core Durable Goods Orders. Estimate 0.1%
  • 8:30 US Durable Goods Orders. Estimate -0.5%
  • 10:00 US Revised UoM Consumer Sentiment. Estimate 94.2
  • 10:00 US Revised UoM Inflation Expectations

*Key events are in bold

*All release times are EDT

USD/JPY for Friday, June 24, 2016

USD/JPY June 24 at 4:10 EDT

Open: 104.91 Low: 98.95  High: 105.70 Close: 103.09

USD/JPY Technical

S3 S2 S1 R1 R2 R3
0.9971 101.07 102.36 103.73 104.99 105.87
  • USD/JPY has posted strong losses, breaking below two support levels
  • There is resistance at 103.73
  • 102.36 is providing support
  • Current range: 102.36 to 103.73

Further levels in both directions:

  • Below: 102.36, 101.07 and 0.9971
  •  Above: 103.73, 104.99 and 105.87

OANDA’s Open Positions Ratio

The USD/JPY ratio is almost unchanged on Friday. Long positions have a strong majority (73%), indicative of trader bias towards USD/JPY reversing directions and moving higher.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Kenny Fisher

Kenny Fisher

Currency Analyst at Market Pulse
Kenny Fisher joined OANDA in 2012 as a Currency Analyst. Kenny writes a daily column about current economic and political developments affecting the major currency pairs, with a focus on fundamental analysis. Kenny began his career in forex at Bendix Foreign Exchange in Toronto, where he worked as a Corporate Account Manager for over seven years.