Britain’s looming Brexit referendum has dominated newspaper headlines across the world this week, the words writ large in every continent. From the balmy streets of Barcelona to the rain-washed alleys of England, discussion about the potential fallout has gripped Europe and its denizens, and with poll results lacking any real clarity regarding the likely results, speculation has been rife.
It is little wonder, then, that the currency markets have been similarly afflicted by Brexit fever. With fears of the leave vote and the uncertainty it would presage haunting traders, sterling has been in freefall for months, and safe-haven assets like the yen and the Swiss franc have been buoyed by the tumult, even as it has pushed the pound down and down again.
With a little over a week to go, we studied data from ETX Capital to see what Brexit has been doing to the currency markets…
A Hunger for Safety
In the world of the foreign exchange, opportunity will always abound in times of uncertainty, but so too will that age-old habit of traders to try and shield themselves from disaster. When fear surfaces, nobody wants to join a beleaguered currency in its fall from grace, and safe haven assets become beloved once more.
Little wonder, then, that the Swiss franc and the yen have surged, with the former hitting an eight-week high on Friday 10th as investors chose to drop riskier assets in its favour. With emerging-market currencies experiencing abandonment by risk-averse traders, and German and Japanese 10-year bonds delivering record low yields, the safe-haven Swiss currency increased by an impressive 0.3 per cent, to its strongest position since 14th April.
The yen experienced a similarly fortuitous rise, strengthening by 0.4 per cent, to 106.68 against the dollar, almost equalling the 18-month high it reported in May.
According to expert David Bloom, these trends are to be expected. As he explains: “People are getting a bit nervous about risk at the moment. We’ve seen bond yields go lower, we’ve seen equities and emerging markets come off a bit, and some of the high beta trades are coming off, so you expect currencies like the Swissie to perform well.”
Sterling was not alone in its fall this week. The Swedish crown also showed a decrease in fortunes, weakening by 0.6 per cent to a 2 ½ week low. Untouched directly by the imminence of Brexit, this trend has been attributed to a surprise stalemate of the euro’s fortunes, which could indeed have something to do with the looming referendum.
One trader explained that: “The moves in the last few days have mainly been locals selling the Swedish crown. The euro was lower against both the Swedish and Norwegian crowns earlier in the week, and everyone was expecting that to go further, so the market has been caught the wrong way round and stops have probably gone flat.”
The other currency obviously impacted by Brexit showed little more in the way of fortune than sterling, with the euro remaining flat at $1.1319. According to currency strategist Chris Turner, the significance of this is clear:
“We believe we are starting to see the early signs of defensive positioning on the euro ahead of the 23rd June Brexit referendum. The euro is clearly under-performing the typical safe havens of the yen plus the intra-European safe havens of the Swiss franc, the Czech crown, and the Danish crown.”
This raises a real question as to what we can expect for Europe and its currency should Britain choose to leave the collective. Although the EU will undoubtedly remain an economic powerhouse, a vote for Brexit would deprive it of one of its strongest, wealthiest, and most stable constituents, and would throw into doubt the future relationships between Britain and its key trading partners, namely Germany, the Netherlands, Belgium, Italy, France, and Spain.
This could have as great an economic impact on these nations as on Britain itself, and with uncertainty almost always preceding depreciations in value, the future of the euro may be in jeopardy should the UK vote to leave.
Finally, the performance of the dollar was also a little jaded. Although it managed to report a modest weekly gain of 0.3 per cent, it is still struggling to get back on track following a devastating jobs report which caused its value to drop by a dramatic 2 per cent the week before. This decimated any hopes that traders had of an interest rate rise in June or July, rocking investor confidence in the currency.
A Period of Uncertainty
What is interesting to note is that the US, which has just dashed hopes of an interest rate rise (mentioned above), is not the only nation likely to delay such decisions for the foreseeable future. Although the Fed and the Bank of Japan both have imminent policy meetings in the pipeline, commentators are suggesting that no major decisions will be made whilst the uncertainty surrounding the Brexit referendum remains.
According to expert Neil Mellor, Brexit uncertainty in the days to come will halt any central bank action, and thus plunge the market into a short period of static movement: “We’ve got a market that is about to batten down the hatches – we’re heading into a period of a lot of uncertainty. A lot of central banks are putting off decisions because of the referendum, and I think next week could therefore be a bit of a wash-out.”
The same will not be true once a decision is reached. Leave or remain, the fallout will be phenomenal, and will rock the currency markets to their very core. Traders can expect an interlude of high volatility, uncertainty, and opportunity.
With the exit polls still providing little guidance on which way the vote will swing, Britain and Europe’s future will come down to the finishing line, with only the event itself revealing the answer that everyone is trying to apprehend, and the final direction that the markets will take.