All Eyes on the EU Referendum

June 20, 2016

The tragic killing Thursday of a pro-EU politician, UK Labour Party MP Jo Cox, occurred just a week before Britain is scheduled to hold its EU referendum to vote on whether or not it will remain in the European Union. This horrific event has naturally sent shockwaves across the UK and around the world, leading to a temporary halt in the previously aggressive campaigning from both sides of the Brexit debate.

From a financial market standpoint, the tragedy has boosted speculation that more support could now be shifting towards the Remain camp, after the past couple of weeks of polling generally showed the Leave camp assuming the lead. Despite this tentatively shifting speculation, however, it is clear that volatility in the polling as well as in the markets will continue to be exceptionally high in the run-up to the referendum. It is also clear that the actual outcome of the vote could very well go either way – Remain or Leave.

This volatility is being displayed distinctly in the most potentially-affected markets, including currencies. The British pound and euro, in particular, have been pressured heavily since the beginning of June, as UK polls began to show that those who leaned toward a UK departure from the EU were gaining momentum over those who wished to remain. These polling results represented a sharp reversal from previous months, when the Remain camp had consistently commanded a relatively comfortable lead.

At the same time that the Leave camp was closing the gap and gaining ground during the first half of this month, the exceptional market risk presented by a possible Brexit outcome boosted safe haven assets and currencies like gold, the Japanese yen, and the Swiss franc. In the case of the yen, the Bank of Japan decided to refrain from implementing additional monetary easing measures on Thursday. This led to a further sharp surge for JPY as the central bank made it clear that it was not going to stand in the way of yen strength for the immediate time being. With that said, however, if a Brexit outcome actually prevails and the safe haven yen surges much more in response, Japan could very well be in the position to intervene in attempts to drive down its currency. The same potentially holds true for the Swiss National Bank, which also left its monetary policy stance unchanged on Thursday, as it could act to halt any excessive appreciation of its safe haven franc.

While the noted tragedy surrounding Jo Cox may have contributed to increased support for the Remain camp and a tentative lifting of pressure off both the pound and euro for the time being, the risk of a Brexit outcome still remains real and substantial. This risk could be reflected next week ahead of the referendum outcome in resumed pressure on sterling and the euro, along with continued support for safe haven currencies like the yen and franc.

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