Global risk appetite was firmly switched off over the past seven days, with GBP/JPY falling as ‘Brexit’ fears spread across the globe.
GBP/JPY in Steady Decline as Referendum Vote Approaches
Pound Sterling has made mostly steady losses against the Japanese Yen over the past few days as referendum fears gripped investors. Multiple polls over the course of the week showed strong support for a ‘Leave’ vote, with the bookies cutting their odds of a ‘Brexit’. The split in the Tory party caused by the referendum widened further after George Osborne forecast a -£30 billion black hole in the budget in the event of a ‘Brexit’. Over 65 Tory MPs signed an open letter vowing to block the Chancellor’s proposed emergency budget – to be implemented in the event of a ‘Leave’ vote – which would contain tax hikes and new austerity measures to plug the funding gap. Labour also declared that it would block such a budget.
Data throughout the week showed that Japanese industry remains in a dire state, although the Yen’s safe-haven status spared it from weakening much against the Pound. Monday’s BSI figures showed that manufacturing in the second quarter declined at an accelerated pace, up to -11.1% from the previous quarter’s -7.9% slide. Japanese industry as a whole dropped -7.9% in Q2 after falling -3.2% in Q1. Industrial production accelerated on the month in April from -0.3% to 0.5%, while the decline in year-on-year production remained pronounced, although it slowed from -3.5% to -3.3%.
GBP/JPY recently hit lows of 146.6162 after reaching a pre-weekend high of 155.1820.
Pound Falls as Bank of England Warns of Sharp Post-‘Brexit’ Depreciation
The Bank of England have become firmly embroiled in the ‘Brexit’ debate today, starting before the Monetary Policy Committee (MPC) meeting minutes had even been announced. The fact that interest rates were left on hold surprised no one, with the focus even more tightly directed at the accompanying policy statement than before.
Campaigners on the ‘Leave’ side have launched a scathing attack on the BoE, with Iain Duncan Smith and Lord Michael Howard co-penning a letter that criticises the Bank’s apparent scaremongering. The missive, appearing in
The Telegraph
, claims:
‘
[The BoE] have been peddling phoney forecasts and scare stories to back up the attempts of David Cameron and George Osborne to frighten the electorate into voting Remain.
’
Refusing to be silenced by the criticism of its impartiality, however, the Bank of England minutes contained much on the topic of a ‘Brexit’, including the prediction that:
‘
On the evidence of the recent behaviour of the foreign exchange market, it appears increasingly likely that, were the UK to vote to leave the EU, sterling’s exchange rate would fall further, perhaps sharply.
’
JPY Rockets Up after Bank of Japan Avoid Further Stimulus Measures
The Bank of Japan surprised investors during yesterday’s Asian session after maintaining a consistent level of asset purchases. Many economists had predicted that the BOJ would be forced to increase stimulus measures thanks to persistently low inflation. Also adding weight to the idea of further easing was the recent strength of the Yen, which has been bolstered due to its status as a safe-haven asset during risk averse trading across the globe.
As a result of the decision, the Yen has advanced 1.5% against the US Dollar, reaching a yearly-high, 2.1% against the Euro to a three-and-a-half year high and 3% against Pound Sterling to hit a 38-month high.
Pound Sterling to Japanese Yen (GBP/JPY) Exchange Rate Forecast: ‘Brexit’ Referendum to Dominate
There is plenty of UK and Japanese data set for release over the course of next week, but the UK’s referendum vote on Thursday is likely to prove the deciding factor of GBP/JPY exchange rate movement.
The Yen will almost certainly see strong depreciation over the next couple of days as traders who bought into the currency while it was ascending indulge in profit taking. The global risk-off trading environment could keep JPY relatively strong, however, with ‘Brexit’ fears likely to keep safe-haven demand high.
Data will still have a role to play, however muted, in driving exchange rates. Monday’s data docket holds UK housing data and Japanese trade balance figures, UK public borrowing figures are scheduled for release on Tuesday and the Japanese Nikkei manufacturing PMI is set for Thursday.