Brexit is the talking point right now. Britain decided to walk out of the European Union in a Referendum that took place in June 2016. This affected the global market scene creating a dramatic situation for the investors and traders. The rise and fall in prices, not only in the forex market but every single investment, is what the experts are chiefly discussing.
Some points that are centre of discussion:
· The markets have become extremely volatile after the people of Britain voted in favour to leave European Union. The point that one must remember is it might have been the decision of Britain but according to Article 50 it might take up to two years for the exit to be negotiated after Britain informs the Union.
· The global growth will be effected by the Brexit; emerging economies are the first to feel the heat of the situation.
· As the rise of the Japanese Yen against dollar has created panic mode in Japan, Japan showed threats to intervene to restrict the damage caused to earnings of major manufacturers and plunge in share prices at Tokyo stock exchange.
· Central bank of Switzerland has been trying to break the strength of France’s currency. Now it seems that Brexit can undo all the efforts made by the Swiss bank.
· Conditions will be volatile for a short period of time.
Although the currency market, along with other markets were enjoying a high period when the speculations were being made that Britain will vote to remain in the EU. The profits turned into risk once the decisions of the people of Britain came out. Pound Sterling saw the historic drop in its value against the US dollar, the lowest in 30 years. the risk aversion started all around the globe. As warned by the IMF, Brexit effects were noticed worldwide.
While there used to be a huge earning potential from speculating before the results were out, the unexpected result of the referendum created situations of turmoil.
The referendum is not the final decision. It is just the decision of Britain. The legal process of Britain leaving European Union will begin only after article 50 is invoked. The legal procedure can take up to 2years. The time period depends on the negotiations that will take place among both the parties.
Brokers developed new techniques and methods to gauge themselves and their traders from the effects of the negative effects of the Brexit.
What were the effects of Brexit on market?
Equity and forex currency were adversely affected by the referendum. Value of pound fell by 10% within the day results were declared. In the Asian trading session, the Great Britain pound or GBP fell to the lowest in 3 decades against the US dollar. It reached a low of 1.3230 against the USD. Brexit’s effect on GBP was worse than the Black Wednesday and the global financial crisis. The longer Britain takes to invoke article 50, the worse the situation of pound will become. The only market that did not face a major loss in UK was Financial Times Stock Exchange 100.
The legal process of a country exiting European Union can take up to 2 years during which the negotiations take place. This means the problems of UK are not over but have just begun. Multinational businesses will refrain from making bigger investment in UK. Some business might even move their headquarters or their operations to some other place. This will lay an impact on UK’s economy which in turn will affect the currency market. There can be a risk of recession in UK.
Euro was also affected like sterling as the exit will affect the European Union. Britain is one of the most important members of the union. Although Brexit can attract more investment to the Eurozone in the longer run, now it can cause damage. Bank shares might fall, Euro will weaken swaps in credit default might widen and many other losses may occur in Eurozone.
Britain’s decision to leave the union benefitted US dollar and then later improved Japanese yen. The reason these currencies performed better is both the currencies perform better during risk aversions.
There was the apprehension that Japan could announce intervention during the jump from 99 to 101.50 that happened during the Asian trading session. But no such announcement was made by Bank of Japan. The Japanese government expressed its discomfort at the volatility of the exchange rate caused by Brexit.
Danish and Swiss bank showed unhidden intervention in the market. Commodity currencies were weakened due to sell-off in the global market. The losses settled under 2% and the oil prices dropped indicating USD and CAD should trade higher but the AUD and NZD showed limited decline. This means AUD and NZD carried higher than USD and CAD. China will survive the Brexit being an important trading partner of Australia and New Zealand. AUD and NZD will recover fast after the market stabilises.
