Anyone that has been reading the news headlines in the financial markets over the last few weeks has undoubtedly turned some of their attention to the possibility that Great Britain might elect to leave the European Union. The financial news media has colorfully termed this event as the ‘Brexit’ and markets analysts have been debating the likelihood of its impact ever since.
For different regions of the world, we will ultimately see a different impact in the sphere of influence. Increased uncertainty in developed markets will create difficult scenarios for emerging markets growth prospects and this can lead to GDP revisions down the road. Here we will look at how markets have behaved since the recent decisions, as further declines in the US dollar/Japanese yen (USD/JPY) could be an indicator of economic weakness in emerging Asia over the next few months.
Chart View: USD/JPY (US Dollar vs. Japanese Yen)
Critical Resistance 1: 109.80
Critical Resistance 2: 106.61
Critical Support 1: 99.00
Critical Support 2: 96.00
To get a broad gauge of how these post-Brexit scenarios are unfolding, it is often a good idea to watch price activity in the USD/JPY currency pair. This is often viewed as a proxy for the risk-relationship in emerging markets and recent price moves here have proved to be telling.
The medium-term downtrend in the USD/JPY is still intact with price trading below the 100-day and 200-day SMA and the daily down trendline. Currently, the price is trading in a risky position as buying or selling activity has increased with volatility. This is a reflection of uncertainty in the market and indicates additional losses for regional assets.
After the sharp downward move in the USD/JPY pair, the price is slowly heading towards the next major Fibonacci retracement level to complete its correction. Market investors are likely to look for selling opportunities near the 61.8 percent Fibonacci retracement level, so this could derail recent trends. With a bearish price action confirmation signal, the first initial target in the USD/JPY will be the 99.00 level. A clear and decisive break will eventually challenge the major support level 96.00.
In order for things to turn bullish, the pair needs to break the 61.8 percent Fibonacci retracement level. With a clear upward break of the 61.8 percent retracement level, the USD/JPY pair will challenge the daily trend line and 100 days moving average at 109.80. If the pair manages to break the medium term downtrend line, then we can assume that the pair will likely head towards the 200-day SMA.
This column was written by Richard Cox, university teacher in international trade and finance, focusing on lessons in macroeconomics and price behavior in equity markets.