Brexit: Everything You Need To Know
Brexit: Everything You Need To Know, Part II: The FX Effect
In just a few days, it’s conceivable that the European Union’s political and economic future could be reshaped by the UK’s June 23-scheduled referendum vote regarding whether Britain should retain membership in, or exit, the EU. Popularly known as ‘Brexit’—shorthand for Britain Exit—the vote outcome could have far-reaching consequences for not just the British and Eurozone economies, but also for global currency and equity markets in particular.
Over the course of three articles, the first of which was published earlier this week, we’re taking a deep look at what the vote means for all involved. Today’s article considers the consequences either a remain or leave outcome might have on major currencies. Part I, Brexit: Everything You Need To Know (But Were Afraid To Ask) , which was published on Tuesday, examined the reasons for the referendum; Part III, which we’ll publish early next week, details the affect the vote will likely have on global and UK stocks.
Prevailing opinion strongly holds that a Brexit from the European Union (EU) would hurt the pound sterling versus foreign currencies, especially vs the US dollar. The reason is simple—the UK's current account deficit.
Current account, which Investopedia defines as “the difference between a nation’s savings and investment,” or more broadly, the difference between the amount of money flowing into and out of the country’s economy, is a critical indicator of a nation’s economic health. The UK's current account deficit, as of Q1 2016, is -32.7B pounds sterling ($43.6B). According to the BBC that’s a record high for the UK.
If that number were shrinking, it would signal that the UK economy was on the right track. Unfortunately it’s been heading in the opposite direction. To make matters worse, it’s the UK’s largest current account deficit of the modern era, as illustrated in the graph below.
More Than Half of Brits Back Brexit: Ipsos MORI
Several recent polls have shown Britons in favor of leaving the EU leading over those wishing to remain in the union, sometimes by small margins.
Coming just a week ahead of the vote, the Ipsos MORI poll for the Evening Standard is notable since it is a telephone poll (which have tended to show 'Remain' ahead) and it removed undecided voters from the mix.
Thursday's poll results are also the first time since the referendum was announced that 'Leave' had higher support than 'Remain'.
The results showed 53% in favor or Brexit, and 47% in favor of the status quo.
May's poll from Ipsos MORI had revealed 37% for 'Leave' vs. 55% for 'Remain'.
Brexit campaigns suspended for the day after MP shot
Attack now looks to be targeted
The assailant has now been arrested and may have targeted MP Jo Cox because of her support for the 'remain' campaign.
One report said he 'shouted Britain First' before attacking here.
Both sides have now suspended campaigns for the day.
From the Manchester Evening News:
An eyewitness said the 41-year-old mother of two was left lying in a pool of blood on the pavement after her assailant struck in Birstall, West Yorkshire. Hichem Ben Abdallah said: "He was kicking her as she was lying on the floor."
He said that after a bystander intervened, the attacker produced a gun, stepped back and shot her twice.
She's in critical condition.Major Currency Views Impact From Brexit
Our poll tracker is pointing to a 47% probability of Leave,and so we would assume the FX markets are pricing around this probability. There has been a strong relationship between the performance of GBP's TWI and the betting market probabilities (Exhibit 16) and similarly with EURCHF.
The performance of currencies in the most recent swing towards "Leave" (June 9- 14) (Exhibit 18) could provide a guide to how FX markets may respond on referendum date. In line with our view, the risk-sensitive currencies have tended to sell off the most versus USD.
Major Currency Views Impact from Brexit
GBP: Most exposed currency within the G10 and EM. Weakens through uncertainty around the UK economic growth and politics. Any commentary from David Cameron and Boris Johnson will be watched by the markets to determine the short-term path for GBP.
EUR: Weakens initially as markets debate the strength of the whole European project and whether another country may follow the UK in wanting to leave the EU. After initial weakness, EURUSD may stabilize around 1.05 as the current account surplus and low global risk appetite mean that eurozone funds find it difficult to find investment opportunities abroad, thus stopping EUR's decline.
JPY: Our favorite currency to buy as it will be driven by low global risk appetite, Japanese fund repatriation from euro zone assets and a hedge in global equity investor portfolios.
CHF: Initial strength because this is a European-related risk event.We expect the SNB to intervene in EURCHF to prevent any rapid volatile fall but not to actively weaken CHF. Our assumption would be that it intervenes if EURCHF is heading below 1.05 within a day.
CAD, NZD, AUD: All these commodity currencies have relatively little trade exposure with the UK so could be relatively stable in the first-round impact from Brexit.What is more important is the global risk environment and commodity prices. China has a large proportion of trade with the EU,and so any global trade slowdown would weaken AUD the most within this group.
EU Referendum: Enjoy Silence Before Storm, Beware of Brexit Polls
European markets have calmed on Friday, with no major macro data due today. The British pound gained some ground after the UK’s EU referendum campaigning was temporarily suspended after Thursday's deadly attack on British Member of Parliament Jo Cox.
The death of the Labour
party MP Cox, who was a supporter of the 'Remain' camp, shows how
divided British society has become on the issue of their future
existence in Europe, especially under the intensified pressure by both
campaign groups ahead of the June vote.
The Bank of England's
(BoE) Governor Mark Carney canceled a speech he was scheduled to give at
the Mansion House on Thursday evening. The 'Vote Leave' chief
campaigners, former London mayor and MP Boris Johnson and UKIP leader
Nigel Farage also canceled their planned events, as did pro-EU
Chancellor George Osborne, who was supposed to hold a rally in Gibraltar
this week. The International Monetary Fund (IMF) also postponed the
publication of its review of the UK economy until Saturday this week.
Beware of polls
Whether
the campaign restarts early next week remains uncertain for now, as the
Parliament is to be recalled next Monday to pay tribute to the Labour
MP. Still, an increased level of volatility is expected to return again
next week shortly before the June 23 vote, as the gap between pro-EU and
anti-EU supporters remains very tight.
As many as four out of
five public opinion polls published in the last five days have shown
stronger support for the 'Leave' camp, while only three out of 12 polls
published so far in June have shown the 'Remain' camp in the lead. Even
though the polls have been showing rising support for Brexit, betting
odds continue to indicate support for the EU membership steady around
66%, with 36% against.
Some commentators and UK political
aficionados argue that the polls ahead of the EU referendum might be as
wrong as they were ahead of the May 2015 general elections. Back in
early 2015, nearly all polls ahead of the vote were predicting a very
tight gap between the Conservatives and the Labour party. The truth
shortly after the election was very surprising, with the Conservatives
winning by a significant majority, while Labour plunged well below
forecasts, and the Liberal Democrats (former government coalition
partner) ended up with a ridiculous eight seats out of 650.
Surveys
have so far been showing a notable number of Britons still undecided
and waiting for a strong and convincing public figure to guide them over
to the right decision. Some analysts argue that it may again be this
group of voters who will decide on the outcome of the June vote.
Brexit polls ... You want MOAR?
If you can't get enough Brexit polls ahead of the June 23 referendum, you're in luck!
- Survation poll for the Mail on Sunday (conducted Friday and Satruday) has Remain on 45% and Leave on 42 (I haven't a link at this stage)
- YouGov poll (conducted June 15 and 16) 42% Remain and 44% Leave
- The latest YouGov/Sunday Times poll has 44% Remain and 43% Leave
- Not a poll, but The Sunday Times have editorialised in favour of Leave (UK's Sunday Times urges readers to vote for 'Leave')
Today's Brexit polls may both drop at 2100 GMT
Talk that today's polls will be released in about 4 hours
Just what this crazy market needs is two polls showing the 'leave' side way ahead.
The market assumes that voters are changing their minds after the assassination of Jo Cox but after the 680 pip rally in GBP since Thursday, that's a dangerous assumption.
Our essential friends over at LiveSquawk are reporting chatter that both polls will hit at or near 2200 in London, that's 2100 GMT and 5 pm in New York.
That's the least-liquid time of day in what's already an illiquid week so be careful.
3 Brexit polls hit in the past few minutes, summary of results
Here are the 2 polls just out, in the order they hit:
Brexit - we've had a poll of polls, now a newspaper of newspapers
Here is a snapshot of many newspaper headlines in Britain - the front pages for Wednesday morning (UK time), which will bring us one day closer to vote day.
Brexit Would Make UK 'Substantially' Poorer: Economists
The statement, coming just a day before Thursday's vote, said that a
Brexit would reduce Britain's GDP growth by about 2% to 3% by 2020, and
2% to 8% by 2030, relative to the UK staying inside the European Union
(EU). In value terms, a 1% drop in GDP is a fall of £19 billion,
equivalent to £720 for each household currently in the UK, the study
said.
Some of the reasons the UK would become poorer in case of
Brexit is an expected strong depreciation of the British currency, which
would in turn translate into significant upward pressure on consumer
prices.
This scenario would reduce real incomes, leading to a
notable reduction in government tax receipts. The government would then
have to increase taxes and reduce public spending in order to ease
pressure on public coffers.
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In just a few days, it’s conceivable that the European Union’s political and economic future could be reshaped by the UK’s June 23-scheduled referendum vote regarding whether Britain should retain membership in, or exit, the EU. Popularly known as ‘Brexit’ – shorthand for Britain Exit—the vote outcome could have far-reaching consequences for not just the British and Eurozone economies, but also for global currency and equity markets in particular.
Over the course of three articles, published within the next week, we’ll take a deeper look at what the vote means for all involved. Today’s article will examine the reasons for the referendum; Part II, which we’ll publish later this week, will consider the consequences either a remain or leave outcome might have on major currencies; and Part III, which we’ll publish early next week, will detail the affect the vote will likely have on global and UK stocks.
What Exactly Is the European Union?
The European Union (EU) is an economic and political union of 28 free states, located primarily on mainland Europe. Each member state acknowledges, upon joining the EU, that they have entered the international treaties covered by the Union of their own free will, without being forced to do so by a third party or superpower. The Union’s strength – and ironically its fragility – comes from that very fact.
Under Article 50 of the EU treaty, "Any Member State may decide to withdraw from the Union in accordance with its own constitutional requirements". To date, none of the EU’s member states has ever elected to leave the Union, while the waiting list to join the EU is lengthy. A decision by the British people to become the first country to leave the EU could have ramifications not only for the UK's future, but also seriously tarnish the EU's prestige and political power.
Prior to the European Union’s founding on November 1, 1993, Britain was part of the much smaller European Economic Community which it joined in 1975. The EEC—often referred to as the Common Market—had 9 member states and was primarily a trading arrangement.
Similar to the EEC, the European Union represents a single market for its member states. But unlike the earlier accord it has evolved into a much broader—and more political—entity that’s headquartered in Brussels, Belgium and along with trade-related issues, legislates over immigration and visa issues as well.
For many in the UK, that’s at the heart of the current problem.
Why does part of the UK want to leave?
Reasons vary. Politically, some citizens are concerned about the ever-growing power of the EU over its member countries. The EU has exclusive legislation power over areas such as common commercial procedures, transport policies, even rules of competition. This essentially means member states no longer have the right to introduce their own legislation in these areas, which many see as weakening individual sovereignty.
Economically, some believe that the free movement of people and goods—a core principal of the EU—is hurting Britain's own economy, as its government is unable to control the influx of migrant workers into the country, and businesses are free to move elsewhere in the EU at will. The border control argument, which has been going on for a number of years now, has gained greater traction recently and is now also being used in a security context, since some believe that disengaging from the European Union's policy towards the Syrian refugee crisis would benefit UK security.
Additionally, the UK contributes billions to the EU budget but gets quite a bit less in return. How much less is the subject of fierce debate. According to fullfact.org, the UK pays an annual 13 billion pound sterling in fees (approximately $18.4B), while it gets back approximately 4.5 billion pounds (approx. $6.4B) in EU spending on the UK, leaving the balance at minus 8.5 billion sterling (approximately $12B) for the UK.
Why would others want to stay?
Of course, those who wish to remain in the EU have their own set of arguments.
Politically, they want to stay in the EU because they believe united, each member country is stronger than it would be on its own. The EU has always seen itself as a global superpower, a status that currently would be unattainable for any of its individual member countries.
Indeed, while the UK, Germany, and France have far-reaching political influence in many different parts of the world, each could not rival the US’s foreign policy clout on their own. This argument also serves stay supporters when discussing security issues, as they believe that strength in numbers is crucial for dealing with future threats.
Economically, EU member countries are able to export within the EU at no cost, boosting sales of British products to mainland Europe. The EU is also able to negotiate better trade deals, as access to the entire European market is an attractive proposition for external trading partners.
Stay supporters argue that the UK will never be able to negotiate better terms on its own. For example, the TTIP, Transatlantic Trade and Investment Partnership, which is currently under negotiation between the US and the EU could become the biggest trade agreement ever formed. Should the UK leave the EU, it would have to negotiate on its own, for better or for worse, depending on one’s perspective.
Finally, while immigrant workers are seen as detrimental to the British economy by supporters of the leave faction, those who wish to stay claim young immigrants help spur growth which will only strengthen the country's economy.
Macro vs Micro
Everything discussed so far concerns the macro economy. But is there a way to prepare your individual portfolio for a possible Brexit? Yes and no.
It’s impossible to foresee all of the different ways 'Brexit' could affect one’s personal investments. However, there are ways to guard against—as well as hedge against—the possibility of a UK exit.
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