Brexit and Yen strength were the two main themes in the markets last week. Sterling tumbled initially during on increasing risk of Brexit but recovered towards the end. In deed, the pound ended as the second strongest major currency next to yen. The Japanese Yen boosted by BoJ's inaction in its monetary policy meeting and markets ignored all verbal warnings from Japanese officials. Canadian dollar lost most among major currencies follow the pull back in oil prices. But it should be noted that the Loonie pared back much losses on Friday as oil recovered. Dollar, on the other hand, reversed earlier gains and ended broadly lower, next to Loonie. In other markets, US 10 year yield dived sharply to as low as 1.1518 but recovered to close at 1.618. Gold breached recent higher and managed to close above 1300 handle at 1301.6. Stocks were soft on risk aversion with global equities closing down for the week.
There were talks that the tragic murder of pro-EU British MP Jo Cox would prompt people to lean towards the "remain" camp and helped Sterling recover. But we're not buying much into this theory. Instead, traders should be lightening up positions before this event risk. This could be seen in recovery in European major currencies, yields and to a lesser extent stocks. There would still be some volatility ahead of the referendum on June 23 but all moves would be temporary. There were various warnings regarding the consequences of Brexit, including BoE and IMF, but markets similar paid little attention to the repeated know messages.
Here are a recap on the central banks events last week. BoJ policy board maintained the target of annual monetary base expansion at JPY 80T by 8-1 vote. Interest rate was held at -0.1% by 7-2 vote. The central bank in the statement that "Japan's economy has continued its moderate recovery trend, although exports and productions have been sluggish due mainly to the effects of slowdown in emerging economies." And it expected sluggishness to remain in export and production. Regarding inflation, BOJ noted that year-on-year rate of CPI change is "likely to be slightly negative or about 0 percent" fort the time being. But "underlying trend in inflation steadily rises, accelerate toward 2 percent". And, BoJ left the option open for additional easing in "quantity, quality and the interest rate" if necessary.
BoE left he policy rate unchanged at 0.5% in June. It also maintained the size of the Asset Purchase program at 375B pound. What interests the market the most is the central bank's latest assessment on the impacts of Brexit, especially the rising lead of the "leave" camp in recent polls. BOE indicated that the outcome of the referendum next week would be the biggest imminent risks facing financial markets in UK, as well as in the world. The negative effects could be reflected through "financial market and confidence channels" and there are "risks of adverse spillovers to the global economy". If Britons eventually decide to leave EU, Governor Mark Carney warned that it would mean a "materially lower path for growth and a notably higher path for inflation", together with a rise in unemployment. On exchange rate, it is expected that "sterling's exchange rate would fall further, perhaps sharply". More in BOE Steps Up Warnings of Post-Brexit Adversity. .
SNB left its deposit rate unchanged at -0.75%, and the target range for 3-month Libor target range stable at between -0.25% and -1.25%, in June. Meanwhile, it kept the GDP growth forecasts unchanged while lifted the inflation outlook. President Thomas Jordan warned of the negative effects of recent Brexit uncertainty, indicating that the issue "has already caused volatility on the financial markets to rise… Uncertainty emanating from political events could escalate, hampering economic development". Recent strength in Swiss franc should extend for a while should Britons decide to leave the EU next week, forcing SNB to intervene in the currency market. More in SNB Keeps Powder Dry Despite Franc Strength, Lifts Inflation Forecasts.
Fed left the Fed funds rate target unchanged at 0.25-0.5% in June. However, the accompanying statement and the staff projections turned out to be more dovish than expected. First, the members voted 10-0 to leave the Fed funds rate unchanged with Esther George joining the camp after supporting rate hikes in both March and April. The median member still calls for 2rate hikes this year, whilst 6 members expect only one rate hike this year. Meanwhile, the median Fed Funds rate expectations for end- 2017 and 2018, as well as the long-run Fed funds rate, have been revised lower. Chair Janet Yellen noted the uncertainty of Brexit referendum on June 23 is a critical factor affecting the rate decision. She still opened the door for a rate hike in July. More in Fed Left Policy Rate Unchanged, More Members Expect Fewer Hikes in 2016.
Regarding trading strategies, we're holding on to CAD/JPY short, entered at 82.25. The cross dropped to as low as 79.29, losing -295 pts or -3.65%. It was indeed to weakest pair last week. We're holding on to the view that down trend from 106.48 is resuming. However, firstly, the recovery ahead of 78.93 low is seen as a warning. Also, CAD/JPY was certainly not the weakest technically as GBP/JPY, EUR/JPY, USD/JPY and even AUD/JPY have taken out equivalent support. And, WTI drew strong support ahead of 55 days EMA and closed at 48.25, after dipping to as low as 45.83. That could be a sign of near term bottoming. Hence, while we'll stay short in CAD/JPY, we'll lower our stop to 82.25, break even level and slightly above 82.08 minor resistance. Firm break of 78.93 will pave the way for our target at 72.13. Meanwhile, with EU referendum in UK approaching, we'll avoid European majors this week. We already have commodity currency and yen covered in our CAD/JPY trade. So, we'll stay away from other pairs and just hold on to the CAD/JPY short.