Referendumitis could well strike the EUR next
The British public did the unimaginable by voting to leave the EU – a move that could trigger other referenda across the Union and this time markets will be less inclined to take expected remain results for granted. For the EUR this signals upcoming bouts of extreme turbulence, which beset GBP after the UK vote.
The EUR now faces an existential crisis, one in which the European Central Bank won’t be able to rescue. The single currency faces the very real prospect of falling to parity or lower against USD over the course of this year and could even cease to exist in a matter of just a few years.
This reflects the fact that the future of the European project must be in serious doubt following the UK’s leave vote unless it immediately starts to fundamentally reforms itself. There have to be some doubts as to whether it’s capable of doing so.
It’s extraordinary to hear European politicians parroting the EU mantra of ‘ever closer union’ after the UK result, when there’s growing evidence that people want more powers repatriated back to their national parliaments. Of course to secure the future of the EUR more integration is needed within the Eurozone and how that conflict with public desires can be resolved is far from clear.
What is remarkable is that UK is not even the most Eurosceptic country according to the US think tank, the Pew Research Center, which published a survey on June 7. It found that 71% of Greeks have an unfavourable view of the EU and surprisingly 61% of the French do and for Spain it’s 49% compared to 48% in the UK, which tied with Germany.
Following the UK vote, opposition parties across the EU are now demanding referenda in their countries on EU membership and they include France, Italy and the Netherlands – all Eurozone members. European governments will do their best to avoid that or set high thresholds for a leave vote, such as requiring a high turn-out and a 60+% majority for an exit to be triggered.
However, it’s far from certain whether people in these countries would vote the same way as the UK. But the risk is there and any further referenda announcements would likely unsettle the EUR. Also, it’s worth keeping an eye on peripheral Eurozone state bond yields – they’re the canaries in the coal mine.
Meanwhile, GBP faces further losses given the UK’s substantial current account deficit and also with existential questions hanging over the UK itself given that a second Scottish independence vote is probably just a matter of time. Not only that, but the UK’s political establishment is now in turmoil and there’s uncertainty hanging over the UK’s global trading relationships.
What has now begun is a period of very high political and economic uncertainty and a US interest rate rise looks very unlikely this year. Indeed, we may see a return to coordinated central bank intervention to stabilise markets. As a new world order or disorder emerges currencies such as GBP and EUR are likely to fair badly. The winners are likely to be gold, but also JPY and USD, which will not please their respective central banks.
TECHNICAL ANALYSIS: EUR/JPY – a good cross to trade Eurozone turmoil
If GBP/JPY was the best major FX pair to trade the UK referendum result – then playing the growing uncertainty over the existence of the EUR is likely to favour EUR/JPY given the latter’s safe haven status.
EUR/JPY has been declining since November 2014 when it peaked at over 148.00 and that fall looks set to carry on in the months ahead. Support is pegged around 112.89, 110.68-87 and 109.58 with resistance at 114.14, 1115.03, 115.80 and 117.49.
Following the extreme volatility on Friday after the UK vote to leave the pair are likely to see some consolidation or even a recovery after punching through the lower Bollinger band. Meanwhile the daily stochastics has issued a strong buy signal and the RSI is very close to being oversold. In the short-term -- and baring any major market news – EUR/JPY are likely to recover. But longer term, the march is likely to continue downwards.
By Justin Pugsley, Markets Analyst, MahiFX