This morning the British public, the global financial markets and the world woke up to the outcome of Britain’s EU referendum, which resulted in a majority vote for Great Britain to leave the European Union. This was largely unexpected and rattled global currency and stock markets in the wake of the announcement this morning.
Following the results, David Cameron announced his resignation as U.K. prime minister, and the governor of the Bank of England made a statement seeking to reassure the financial markets and the British public that the Bank of England is ready to act to support the British economy.
The first reaction of the financial markets has been a collapse in the sterling rate. The British pound crashed to a 30-year low and is trading at around U.S. $1.35, which is an over 10% intraday drop against the dollar, and at around EUR 1.24, which is a 5% intraday drop against the euro. Another currency that has been experiencing strong moves this morning has been the Swiss franc. The CHF rallied aggressively, due to the safe haven nature of the currency and is trading at around 1.08 against the euro and 1.33 against the pound.
Since the announcement that the British public voted for the "Brexit," Britain’s currency has weakened against all major currencies, as uncertainty over the British economic future looms. A sharp drop in U.K. risky asset prices, delays to investment, disruption to trade and a loss of business and consumer confidence mean the British economy is most likely on its way to a recession within the next two years.
Equity markets dropped across the board. The FTSE 100 opened around 5% lower on the open while equity futures globally dropped anywhere from 3% to 10% after the results of the referendum were announced.
While both the pound and equities have rebounded slightly since this morning, the trend for the sterling exchange rate against other major currencies will most likely be downward in the coming months as uncertainty over the future of Britain’s economy will continue.
Commercial foreign exchange companies
A day like today is unprecedented in the global currency market and has caused extreme volatility in most major currency pairs. This impact is being felt strongly at commercial foreign exchange companies as they are on the front line of the global forex market. Commercial foreign exchange companies offer low-cost international money transfers, currency hedging derivatives (such as FX options and forward agreements) and guidance to SMEs, expats, private investors and high net worth individuals.
According to Alon Rajic, managing director of MoneyTransferComparison.com, a leading site that oversees the foreign exchange industry, “There has been a surge of more than 50% in traffic on our site this week due to Brexit fears and since the announcement of the referendum’s results we have witnessed the biggest spike in traffic our site has ever seen, despite Friday morning normally being a rather quiet time as the majority of people don’t like to trade currencies ahead of the weekend when the markets are closed.”
He further added that “as the sterling and euro rates are slowly recovering somewhat, our customers are starting to feel a bit more calm after this morning’s flurry of activity, which peaked between 8 a.m. and 9 a.m.”
In light of the Brexit, international money transfers startup TransferWise has advised its customers ahead of the referendum to refrain from making any currency transfers involving the pound immediately before and after the result announcement. While forex industry leaders World First, MoneyCorp and Currencies Direct halted all usage of their online trading platforms and currently only allow deals via telephone, due to the extreme volatility in the currency markets today, some foreign exchange websites were down completely for brief periods of time.
It was also reported to Rajic that World First intends to operate extended hours today, as well as on Monday and Tuesday, to support all its clients' requests.
“Today there are a lot of people looking to take advantage of rates moving in their direction, while others are trying to get top-notch free foreign exchange guidance from foreign exchange companies to form a strategy on how to act,” Rajic told us.
Retail forex trading and spread betting
Right in the middle of the post-Brexit vote volatility in global markets are retail forex trading brokerages and spread betting companies. Retail forex brokers are online brokerages that allow small investors and day traders to trade currencies at a low cost and using leverage. That means that as a private individual you can leverage a trade at a ratio of 20:1 or 50:1, so that you can move for example GBP 5000 worth of a currency by only putting down GBP 100 as an initial margin for the trade.
Spread betting companies, such as IG Index and ETX Capital, also allow users to trade currencies and other asset classes such as stocks, indices and commodities, using leverage via online or mobile platforms. Forex trading and spread betting is popular among individuals you want to earn an income by trading the financial markets.
The Brexit is a challenge to forex brokers and spread betting companies, as they need to hedge their currency exposure to the British pound; otherwise, this could lead to huge losses on their trading books.
That is not the only challenge that FX online brokerages will face now. Online brokerages tend to hold their client funds in segregated accounts at major banks, and banking stability in the U.K. is now at a major low, which may deter clients from holding too much money in their brokerage accounts. Furthermore, there is a regulatory risk now for brokerages based in the U.K. as the FCA regulates them. If that will no longer be accepted in the EU, this could have a devastating effect on the businesses that have a substantial client base in Europe. These companies would need to apply for new licenses to operate the EU and that would cost money and take time.
The uncertainty stemming from Britain’s process of leaving the EU could end up hitting FX brokerages hard, despite the increased business from higher currency trading volumes due to the Brexit volatility.
Possible medium- and long-term results of the Brexit
While no one really knows what is going to happen now in the United Kingdom, there are several possible medium- and long-term results of the Brexit.
Scotland could vote for independence, as it wants to stay in the EU. This scenario is not so unlikely, given that 62% of referendum voters in Scotland voted for Britain to remain in the EU. Northern Ireland now also becomes a candidate to split from the U.K. as the majority voted to remain in the EU. A reunification vote with the Republic of Ireland could now be in the cards, according to Northern Ireland’s Deputy First Minister Martin McGuinness.
Furthermore, equity markets could move into a deeper correction as economic uncertainty in the UK and Eurozone continues as no clear Brexit process occurs in a timely manner. This would also weigh heavily on the British pound.
Having said that, the opposite could also take place. Should the Brexit process guidelines be formed quickly and the negotiations with the EU on trade agreements run smoothly, then we could see the sterling rate recover rather quickly and equity markets would recover again also.
The bottom line
While uncertainty and volatility is the key theme of the day, if you need to conduct international money transfers or if you want to trade currencies to make a speculative profit, then you should go ahead and do so. No one really knows how the result of this referendum will play out for the United Kingdom and the EU. And we simply do not know where the pound and the stock market will be in a few months or a year’s time.
Disclosure: I have no position in any financial instrument discussed here.
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