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FOMC, BOJ Make One Thing Clear: Don't Take Brexit Lightly

FOMC, BOJ Make One Thing Clear: Don't Take Brexit Lightly

Christopher Vecchio, CFA, Senior Strategist

Talking Points:

- Both Fed and BOJ withhold action to wait for Brexit.

- Any policy could be unwound by next Thursday depending on vote.

- FX volatility set to remain high with the Brexit vote next week - it's the right time to review risk management principles to protect your capital.

The US Dollar is posting some modest strength today, even as USD/JPY has slid to fresh yearly lows below ¥105.00. This is not a good sign for risk assets (the German DAX and Japanese Nikkei 225 come to mind), particularly in context for the reason why: the world's most influential central banks are increasingly uncertain about the future.

Consider the Federal Reserve: rate hikes are desired. Yet raising rates yesterday, with the June 23 UK-EU referendum next week, could be a trap for Fed credibility; if they hike and a Brexit transpires, they would quickly have to backtrack. Same goes for the Bank of Japan: a weaker Japanese Yen is desired. Yet using their ammunition to weaken the Yen now could mean that their entire efforts would be unwound by next week, a trap for BOJ credibility.

For the Fed, it makes sense to wait now that recent US labor market data has slowed and longer-run inflation expectations have become unmoored. Likewise, for the BOJ, in the event that a Brexit does happen, it's very likely that the Japanese Yen becomes the global safe haven almost instantaneously.

In such an environment, it would actually be easier for Japanese finance and monetary officials to get approval from the international community to intervene to weaken the Yen - it'd be seen as a 'necessary precaution.' The BOJ may have disappointed last night, but the intervention threat in the Yen is growing as the June 23 vote approaches.

See the video (above) for technical considerations in EUR/USD, GBP/USD, USD/JPY, AUD/USD, and the USDOLLAR Index.

Read more: Osborne Hints at More Austerity as ’Leave’ Outlines Path After Brexit

--- Written by Christopher Vecchio, Currency Strategist

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

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