So now it's done, Britons voted 52-48 to decide to leave EU. The news rocked the markets and sent Sterling to the lowest level against dollar since 1985, in the biggest move on record, followed only by the infamous Black Wednesday. The news also dragged Euro sharply lower and only stabilized after SNB intervened in the markets to curb EUR/CHF decline. Yen was the strongest major currency last week on risk aversion. And that was, surprisingly followed by Aussie and Kiwi, probably due to seek for yields and safe assets. The dollar index jumped through 95.96 resistance to as high as 96.70 before closing at 95.44. And that can be a sign of near term strength in the greenback. Though, we'll have to wait and see the developments to confirm.
The reactions in stock markets are worth a note. It's known that the Brexit news crushed global equities markets. DJIA lost -3.4%, or -610 pts on Friday to close to week at 17400.75. DAX lost nearly -700 pts, or -6.8% while CAC lost -360 pts, or -8%. However, FTSE tumbled to as low as 5788.74 on Friday, but recovered to close at 6138.69, well inside prior week's range. It's believed that the falling Sterling might indeed have a short term boost to company earnings which have lots of overseas revenues. The resilience in FTSE will remain in doubt though.
There are a could of developments to watch in the coming days and weeks. Six EU foreign minister showed unity in Berlin and urged UK to leave EU as soon as possible. German foreign minister Frank-Walter Steineier held talks with colleagues from France, Italy, the Netherlands, Belgium and Luxemburg . They said in a joint statement that "this process should start as soon as possible:" European commission president Jean-Claude Juncker also said that "it doesn't make any sense to wait until October to try to negotiate the terms of their departure". Now, German Chancellor Angela Merkel will meet with Italian prime minister Matteo Renzi, French president Francois Hollande and president of European council Donald Tusk on Monday. The 28 commissioners are also due to meet on Monday in Brussels, with a two day summit of national leaders on Tuesday and Wednesday. More news will be coming out of Europe regarding the issue of Brexit.
In UK, prime minister David Cameron has already announced his resignation after the referendum. UK's European commission Jonathan Hill also announced resignation. It's now uncertain who will head the country to activate the so called Article 50 for withdrawal from EU and handle all the negotiations. Meanwhile, the drama went on with 2.1m Britons signed a petition for another EU referendum. Scottish first minister Nicola Sturgeon said she'll start working for a new referendum on independence as UK as a whole decided to leave but Scotland voted to remain. The chaos in UK will likely continue for a while at least.
Rating agency Moody's downgraded the outlook for the Aa1 British government debt from "stable" to "negative". Moody's noted that "during the several years in which the UK will have to renegotiate its trade relations with the EU, Moody's expects heightened uncertainty, diminished confidence and lower spending and investment to result in weaker growth." And, "policy predictability and effectiveness of economic policymaking ... might be somewhat diminished". Also, "the challenges for policymakers and officials will be substantial." Meanwhile, "the UK government has one of the largest budget deficits among advanced economies, and lower GDP growth will further complicate the implementation of the government's multiyear fiscal consolidation plan." The will certainly be more actions from rating agencies ahead.
The Bank for International Settlements said that "governors endorsed the contingency measures put in place by the Bank of England and emphasized the preparedness of central banks to support the proper functioning of financial markets." And, "central banks will carefully monitor market functioning and stability, and cooperate closely." Markets will be keenly await responses from major central banks on the issue. SNB already intervened in the currency markets. There are continuous speculations that BoJ would announce emergency measures. And, the markets are already starting pricing in 7.2% chance of a "rate cut" by Fed in July. We'll have RBA meeting on July 5, BoC meeting on July 13, BoE meeting on July 13, ECB on July 21, Fed on July 27 and BoJ on July 28. But we won't be surprised that there would be surprised announcements by individual central bank before the meeting or even coordinated measures.
Regarding trading strategy, we were correct in anticipating decline in CAD/JPY as the cross shot below 78.93 low to as low as 76.13. However, we were caught by the pre-Brexit rebound and was stopped out breakeven at 82.25. For the week ahead, we'll hold our hands off first.
GBP/JPY dived to as low as 133.23 last week as the down trend from 195.86 extended. Initial bias stays on the downside this week for next projection level at 122.71. On the upside, above 145.38 will turn bias neutral and bring consolidations. But recovery should be limited well below 160.08 resistance and bring fall resumption.
In the bigger picture, fall from 195.86 medium term top is still in progress and met 61.8% projection of 195.86 to 154.70 from 163.87 at 138.43 already. There is no indication of bottoming yet. Current acceleration suggests that deeper decline would be seen to 100% projection at 122.71, with prospect of retesting 116.83 (2011 low). On the upside, break of 154.70 support turned resistance is needed to be the first sign medium term bottoming. Otherwise, outlook will remain bearish in case of recovery.
In the longer term picture, the momentum in the current fall from 195.86 argues that it could be developing into a long term move that resumes the down trend from 251.09. And in that case break of 116.83 low could be seen. We'll wait a see the post Brexit development first before taking on the bearish view.