Markets Driven by Brexit Polls as Vote Looms

• Risk appetite may further strenghten as new polls on the EU referendum indicate that the “remain” campaign is closing the gap
• The pound sterling rise is improving odds that the UK will remain in the European Union
• However, we remain positive on the Japanese yen as the high degree of uncertainty about the outcome will be supportive for safe haven assets ahead of Thursday’s outcome
• Gold prices may continue to trade sideways ahead of Thursday. In the event of a Brexit, gold prices will most likely go through the roof, moving quickly towards the 1,400 level
• If Brits decide to stay the EU, gold will reverse sharply, with the 1,200 level as first target
• The single currency  is now moving towards the 1.14 resistance area and is the riskiest currency to hold ahead of the Brexit vote
• We believe that the BoJ, which has decided not to add further stimulus last Thursday, is waiting to assess the market impact that the Brexit referendum may trigger
• According to the results, uncertainties may increase and this would push the central bank to react as the Japanese economy is facing difficulties and as a result we clearly expect that further stimulus will be added in July

Risk appetite has come surging back as new polls on the EU referendum indicate that the “remain” campaign is closing the gap. The pound sterling rose the most among the G10 complex amid improving odds that the UK will remain within the European Union. Over the last few weeks the market has been moving back-and-forth between risk-on and risk-off mode as pollsters released contradictory temporary results. This morning, the latest poll showed that the “Stay” camp is gaining traction; therefore, the market has switched to risk-on mode with investors buying the pound sterling, the euro and equities, while dumping gold and the Japanese yen. A Bloomberg composite poll indicates a 45% to 42% lead for “remain”.

Investors are turning their back on the Japanese yen as risk sentiment improves. USD/JPY surged 0.50% at the opening and hit 104.85 before stabilising at around 104.65. However, we remain positive on the Japanese yen as we are heading towards the vote. The high uncertainty about the outcome, which is exacerbated by the weak reliability of polls in such a tight race, will be supportive for safe haven assets ahead of Thursday’s outcome.

Yann Quelenn, market analyst: Japan: Concerning trade balance data: “As a result of ongoing global uncertainty, investors are looking for political stability in Japan, despite the fact that the country’s fundamentals remain weak. Japan’s trade data for May was released last night showing that the deficit has increased by yen 41 billion when financial markets were actually expecting a decrease of the same amount. Exports are suffering from a stronger yen and declined by 11.3% y/y in May, continuing the downward trend line from April when exports dropped 10.4%. Exports with China, main Japan’s commercial partner saw a particularly large drop declining by 14.9%. Toward the United States, exports have also recorded a strong loss of 10.7%. The recent appreciation of 15% of the yen has largely contributed to the decrease in Japanese exports. Last week the yen reached a 21-month high against the greenback and currently stands at 104 yen for a dollar note. We are in a period where risk-off sentiment dominates and this is definitely weighing on the Japanese economy. We believe that the BoJ, which decided not to add further stimulus last Thursday, is waiting to assess the kind of market impact the Brexit referendum will trigger. According to the results, uncertainties may increase and this would push the central bank to react as the Japanese economy is facing difficulties and as a result we clearly expect further stimulus to be added in July. Worryingly, Japan’s newswires are reporting that the BoJ holds more than a third of all JGB. The size of the BoJ’s exposure in rates indicates the limit of further monetary policy expansion. GBPJPY rose to 104.30 early on UK “remain” polls.” —

Gold is having another tough day as it fell 1.20% in Tokyo. Even the uncertainty generated by the British situation has not allowed the yellow metal to break the strong resistance implied by the high from January 22nd 2015 at $1,307.62. Gold prices will continue to trade sideways ahead of Thursday. In the event of a Brexit, the price of gold will most likely go through the roof, moving quickly towards the 1,400 level. However, if Brits decide to stay in the EU, gold will reverse sharply, with the 1,200 level as the first target.

EUR/USD also had a great night. The single currency gained 0.80% against the greenback and is now moving towards the 1.14 resistance area (previous high and psychological level). From our standpoint, the single currency is the riskiest currency to hold ahead of the Brexit vote as the consequences for the EU are very unclear and will likely generate a high degree of political uncertainty. We therefore recommend caution when trading EUR crosses.

In the equity market, Asian regional markets were trading higher across the board with the exception of Chinese equities. The Nikkei and Topix index were up 2.43% and 2.44%. In Hong Kong the Hang Seng rose 1.23%, while in Taiwan, the Taiex surged 0.68%. In mainland China, the Shanghai Composite edged down 0.05%, while the tech-heavy Shenzhen Composite added 0.27%. In Europe, futures are trading in positive territory with futures on Footsie surging 2.66%. US futures are also pointing towards a higher open.

Today traders will be watching PPI from Germany, SNB’s sight deposit from Switzerland; wholesale trade sales from Canada; unemployment rate, real wages and retail sales from Russia; weekly trade balance from Brazil.