Sterling and the yen are center stage - BBH

Research Team at BBH, notes that the Sterling remained under pressure in the second week after the referendum as it reached a low just below $1.28 in the middle of the week before consolidating.  

Key Quotes

“It appears to be encountering fresh sales on short-covering bounces through $1.30.   

The pound has fallen for three consecutive weeks and in five of the past six weeks. Although technical indicators are stretched, there is no sign of divergences or a change in trend.  With the Tory PM candidates selected, and little post-referendum data, sterling may soon exhaust the current news stream.  A 15% depreciation of sterling from its pre-referendum high would bring it to around $1.2750, which would allow for a marginal new low.

Of course, we will monitor the price action, but the point is that investors may want to be on watch for a reversal pattern in sterling.  This is a short-term, tactical call. Over the medium- to longer-term, we continue to see potential toward $1.15-$1.20.  

There has been no reprieve for the yen.  The yen gained about 1.8% against the dollar last week, leaving the greenback holding just above JPY100.  A break would immediately target JPY99.00, the Brexit spike low, but increasingly there is talk of a move toward JPY95. The initial cap is seen near JPY101.50, with convincing penetration, allowing for JPY103.00.   

We remain skeptical of the conventional narrative that explains the yen's strength as safe haven demand.  Portfolio flows that track purchases of bills and bonds show foreign interest (though two week ago foreign investors sold a near-record amount of fixed income instruments), but not in sufficient size by themselves, and especially if the inflows are netted to account for Japanese portfolio capital outflows, to account for the yen's surge.  Nor are speculative flows, extrapolating from activity in the futures market adequate to the explanatory task at hand.

The most compelling hypothesis is that the upward pressure on the yen is being driven by Japanese asset managers raising long yen hedges on foreign portfolio investment.  Japanese corporations who retained foreign earnings in high yielding foreign currency securities may also be increasing hedges.   In effect, the yen strength is the unwinding of the substantial yen short that Japanese institutional investors and corporations had amassed during the early days of Abenomics.”