Watch Yen strength on Brexit on risk sentiment - Nomura

Analysts at Nomura noted that JPY appreciation pressures have accelerated again as uncertainty about the outcome of the UK referendum on EU membership has increased. 

Key Quotes:

"The latest opinion polls show that stronger momentum in the leave camp and uncertainty on the result remains high. Bookmaker odds show that the probability of Brexit is now slightly higher than 30% too. Amid risk-off sentiment, Japanese yields have been declining in nominal and real terms, and the latest JPY appreciation has diverged from the real rate differential. The divergence is clearer in EUR/JPY trading.

 The real 10yr rate differential between Germany and Japan has pointed to a gradual recovery in EUR/JPY to the 125- 130 range, while EUR/JPY actually undercut 120 today. We judge GBP/JPY will benefit the most from a Bremain result, with the currency pair to depreciate the most under a Brexit outcome.

In contrast, investors may be concerned about the negative spillover impact on the euro area economy from a Brexit outcome, and EUR/JPY selling is likely viewed as a hedging tool against a tail-risk event. Albeit less significant than EUR/JPY trading, USD/JPY has also been trading more weakly than the real rate spread suggests. Ahead of the highly uncertain event, the BOJ will face a difficult choice this week.

According to Bloomberg, 28% of BOJ watchers expect the BOJ to ease this week, while 55% of them expect an easing in July.The positive market impact from a BOJ easing this week could be offset by uncertainty on the referendum, which would encourage the Bank to wait and see for now, in our view. 

If Bremain is confirmed, as we expect, USD/JPY and EUR/JPY are likely to trade strongly as rate spreads suggest, even without a BOJ easing this week. We judge Bremain is the most likely outcome of the UK referendum, which should weaken JPY broadly later this month. 

Nonetheless, in the short term, uncertainty about the outcome of the UK referendum on EU membership is likely to continue putting downward pressure on USD/JPY and EUR/JPY."