A quick look at EUR/JPY and referendum developments

Greece and China have caused a huge spike in implied volatility and if you look at price action in EUR/JPY we saw the pair trade to ¥133.78, but has since reversed and nearly filled the gap after yesterday’s weak open.

Source: Bloomberg

Has this short squeeze provided traders with an opportunity to establish short positions? I feel this could be the case, although short European equities, long bunds (short Italian BTP’s) has been the more straightforward trade. It is also clear markets are now a slave to headlines around the referendum polls, so trading the EUR is tough, especially with money managers having to adjust equity and fixed income portfolio currency hedges. In fact, why the pair managed a 300 pip bounce from the session low is interesting in itself and smells of short covering, given there hasn't really been much in the way of EUR positive news.

I would therefore keep position sizing small, especially given implied volatility had one of the biggest daily moves for years. I would also use the April uptrend (¥139.00) as a guide for any stop loss.

There were two polls that came out last yesterday and although I don't know the sample size both suggested the ‘yes’ camp held the upper hand. This is modestly EUR positive, although what happens from here is still open to debate and promises to be very messy.

There was some support to the ‘no’ camp overnight as well. Certainly, the 17,000 people gathered outside the Greek parliament were all making the case for a ‘Grexit’ loud and clear. You can also throw in supportive comments (for the ‘no’ camp) from Nobel prize-winning economist Joseph Stiglitz and also even the former Archbishop of Canterbury and you simply can’t rule out a ‘no’ vote at this coming weekend’s referendum.

We have seen strategists at a number of investment banks talking about the probability of a ‘Grexit’. These currently stand at:

Morgan Stanley – 60%

RBS – 40%

Credit Suisse – ‘At least 50% if ELA is withdrawn’

Standard and Poor’s – 50%

Citigroup – Expects a comfortable ‘yes’

Mohamed El-Erian – 85%

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