Yen to Rally Against Euro as UK Prepares for Referendum

Yen to Rally Against Euro as UK Prepares for Referendum
June 13, 2016

 
For several months as of now, analysts’ have been concentrating on the impact of Brexit on the economy of the UK. There have been many research reports on the impact of Brexit on the Euro zone. As the date of referendum gets closer, analysts have started looking at the other side of the coin. The investors have also started to stay away from making risky bets on the Euro. Thus, analysts expect the Euro to remain weak at least till the end of the referendum.

On the other hand, the Japanese yen, based on its appeal as a safe haven currency, is expected to strengthen further against all the currencies, including the Euro, in the days to come. The EURJPY currency pair, which was trading at about 123.20 levels, has lost more than 300 pips in the past one week. Any uptrend in the currency pair should be used as an opportunity to go short because of the following reasons.

In the case of a Brexit, nearly 0.3% of Europe’s GDP is expected to be wiped off in just two years. It is needless to say that the 19 countries using the single currency would face a lot of economic issues. In particular, Malta, Belgium, Netherlands, and Luxembourg are expected to face severe economic declines ranging from 1% to 7%. Germany, the most important country in the European Union, is expected to see a 0.5% decline in the GDP.

It is estimated that the trade with Britain has resulted in the creation of nearly two million jobs or 1.5% of the total employment in the Euro zone. Certainly, a good percentage of these jobs would be washed away.

The net contribution of Britain to the EU budget was $7.1 billion Euros in 2014. That is almost 5% of the total EU budget. In the case of a Brexit, Germany would probably be forced to fill a major portion of the gap. Germany’s Ifo institute estimates that the sum would be as high as $2.5 billion. Thus, considering these facts, the Euro would remain weak and volatile for the rest of the month. The uncertainty would bolster the Japanese Yen as investors would run for a cover. Thus, we can fundamentally anticipate the EURJPY to remain bearish in June.

Technically, the MACD indicator’s main line, apart from falling below the signal line, has begun a long-term decline below the zero line. The EURJPY currency pair is moving along a declining channel. The currency pair has also broken below a crucial support at 122.10.

EURJPY - Technical Analysis - 13th June 2016

Thus, a forex trader should go short at 122.10 levels with stop loss above 125.10. The ideal target price for the short trade is 112.0. The trade carries a risk to reward ratio of 1:3. Alternatively, to avoid the cumbersome task of placing a stop loss order and regularly monitoring it, a trader can pick a one touch put option from a suitable binary broker.

Traders with risk appetite can even choose a ladder put option contract. Conservative traders can choose a target price of 119 or higher. Those who have opted to trade a ladder contract should ensure that the lowest target price is no less than 112 in the ladder. Both kinds of traders should preferably opt for an expiry in the first week of July.

Sammy

Sammy

Sammy is our forex expert, with over 20 years experience in the financial sector, she will be keeping you up to date with the ups and downs of currencies around the world


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