Global markets were rocked by Brexit vote on June 24. The result was a drop in the USD/JPY pair to a low of 97.79 levels on June 24. Dow index also printed a low of 17,063 on June 27.
World didn’t come to an end after Brexit, but…
Contrary to the argument put forward by pro-EU camp before the referendum, the world did not come to a post Brexit. However, the one-day shock and awe in the markets and the resulting drop in the USD/JPY pair to 97.79 wax enough to trigger speculation the Bank of Japan (BOJ) and Japanese government would do more.
Corrective move in FTSE100 and USD/JPY to 103.39 after Brexit vote helped Dow recover to 18,000-18,100 levels. The real fun began on July 11 after Abe’s landslide victory in elections convinced markets that the PM now has more scope to deliver a much needed stimulus.
USD/JPY opened at 100.59 on July 11 and clocked a high of 107.49 on July 21. The entire rally was due to expectations the Japanese government would deliver fiscal stimulus in support of additional stimulus from Bank of Japan. During the same time Dow jumped from 18,000 to record high of 18,622 levels.
Thus, the rally in Dow Jones appears to be Yen funded. Increased bets of fiscal stimulus triggered Yen carry trade.
What if BOJ/Japanese government disappoints?
Monetary and fiscal stimulus appears to have been priced-in by markets. However, if there is a disappointment on monetary or fiscal front or both, then USD/JPY risks a sharp snap back. Sudden reversal in Yen could weigh over Dow index, in which case the index could at least retrace below sub 18K levels. In case the stimulus goes to extremes, a sell-off in Yen if not accompanied by Japanese bond market jitters could pull Dow to further highs.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.
Recommended content
Editors’ Picks
EUR/USD clings to daily gains above 1.0650
EUR/USD gained traction and turned positive on the day above 1.0650. The improvement seen in risk mood following the earlier flight to safety weighs on the US Dollar ahead of the weekend and helps the pair push higher.
GBP/USD recovers toward 1.2450 after UK Retail Sales data
GBP/USD reversed its direction and advanced to the 1.2450 area after touching a fresh multi-month low below 1.2400 in the Asian session. The positive shift seen in risk mood on easing fears over a deepening Iran-Israel conflict supports the pair.
Gold holds steady at around $2,380 following earlier spike
Gold stabilized near $2,380 after spiking above $2,400 with the immediate reaction to reports of Israel striking Iran. Meanwhile, the pullback seen in the US Treasury bond yields helps XAU/USD hold its ground.
Bitcoin Weekly Forecast: BTC post-halving rally could be partially priced in Premium
Bitcoin price shows no signs of directional bias while it holds above $60,000. The fourth BTC halving is partially priced in, according to Deutsche Bank’s research.
Week ahead – US GDP and BoJ decision on top of next week’s agenda
US GDP, core PCE and PMIs the next tests for the Dollar. Investors await BoJ for guidance about next rate hike. EU and UK PMIs, as well as Australian CPIs also on tap.