The Brexit vote on June 23rd has propelled the UK on a path out of the European Union, in a referendum result which has shocked the world and most of all, the UK. After a bitterly fought and divisive campaign the population voted 51.9% in favor of leaving the EU.
The events of the day, and the political fallout continue to be widely reported so there is limited value in expanding on them here. In a follow-up to our March 25th article “Will Britain leave the EU? The currency thinks so…” we take a look forward to some of the implications for our clients, both in terms of possible legal and regulatory changes for companies with overseas offices in the UK and Europe, and in terms of the currency implications of political and economic uncertainty over the months to come.
Articles with detailed background for further info:
What happens now?
There is a great deal of uncertainty surrounding what happens next. What we do know, is that David Cameron the UK Prime Minister has stated his intention to stand down and hand over power to his successor in time for the Conservative Party conference, in October. He also stated he will leave it to his successor to invoke ‘Article 50’ of the European Constitution and begin the formal notification process for leaving the EU, so we know it will be at least until October before the process of formal negotiation can begin, a process which can take as long as 2 years based on the official guidelines set out in Article 50.
What are the implications for currency markets:
The markets had thought the remain camp would win the day, so the shock of the result led to the Pound’s worst day in modern history, falling from 1.50 to as low as 1.3250 in the early hours of Friday morning (in the UK). On Friday the currency made a slight recovery to 1.39 but over the weekend traders have had time to consider the medium term outlook for the UK economy and the Pound has made new lows to the downside on Monday.
The risk, as we mentioned in March, aside from the uncertainty, is the UK has been running a budget deficit which, when viewed in isolation will be detrimental to the Pound. There are now credible forecasts which indicate the currency may fall as low as 1.20 against the Dollar by the end of this year.
The main beneficiary currencies are likely to be the CHF, JPY and USD which are typically viewed as safe havens during times of market stress, and one very important currency we have not focused on yet is the Euro. Once the dust begins to settle over the coming days and weeks, the likelihood of political maneuvering, with countries trying to negotiate for a ‘better deal’ at a time of EU weakness or nationalist parties gaining strength and demanding their own referendum on EU membership will most likely begin to eat away at the credibility of the Euro itself. These are grave times indeed for the single currency – with severe implications to ALL markets.
For companies with corporate structures in Europe & UK:
Imports and exports
Thanks to the common membership of the customs union, the UK and European companies can trade goods with each other without having to pay customs duties or other charges. While there are various options for the UK to share an internal market with EU Member States post Brexit, for instance, by joining EFTA, it is by no means certain that such accession will take place.
Corporate structures and tax
With a large number of US firms with European HQ’s in the UK, Brexit may necessitate a review and potential revision of the corporate structures of these subsidiaries, not least in light of ensuing tax implications. Whether or not the potential discontinuation of the application of European legal standards to employment law in the UK will have any impact remains to be seen.
Under the Rome I Regulation, contracts are normally governed by the law chosen by the parties. It follows that Brexit, depending on the form it would ultimately take, could also have a bearing on the continuity of existing contracts. Again, while the mid to long term effects are hard to predict, the short term impact of Brexit could be one of hesitation affecting existing trade relations.
Still early days but the probability of more disruption in markets remains high. Align will continue to serve our customers through this time, whether by continuing to provide liquidity for GBP and EUR transactions (where other companies shut their doors), or by bringing news of ongoing events.