With just over 2 weeks before the EU referendum, it’s becoming less transparent as to which way the polls will go. Recent polls from The Telegraph YouGov lean towards a leave vote whilst David Cameron calls a meeting yesterday to remind the British public of the implications of a Brexit.
There have been many discussions on the impact a Brexit will have on Pound Sterling, but it is also worth discussing how a leave for the UK could affect the Euro and US Dollar.
How will a Brexit impact the Euro?
Given that the UK is one of the largest contributors to the EU, as well as being one of the only few members that gives more to the economy than it takes, it would not be a surprise if the Euro weakened in the event of a Brexit.
We only need to look at the problems in Greece to understand that the EU has a number of hurdles to overcome and the financial contribution from the UK is of great benefit to the Eurozone.
Not to mention that any dismantling of the UK from the EU is reciprocated and investors will shy away from both the UK and EU until certainty begins to creep in, the impact of a leave vote therefore, will most likely impact businesses and trade for both the UK and the EU.
Setting aside the referendum, there are a number of factors within the EU that point towards economic weakness, Germany’s 10-year bond is on the cusp of turning negative falling to a record low of 0.033%, a long term investment in Europe yields very little in return.
Tomorrow’s German releases for imports, exports and current accounts will be of importance tomorrow, given how their import price index and manufacturing figures last week came out worse than anticipated, I will not be surprised to see negative data to be released.
The EU is in very little growth and in the event the UK were to leave the EU, I feel that the EU would be affected just as much as the UK.
How will a Brexit impact the US Dollar?
Often in terms of economic uncertainty investors move to safe-haven currencies such as the USD, although this may ring true I do not expect the USD to find strength in the event of a Brexit.
The FED Interest rate announcements back in December have already been cut from 4 hikes to 2, and it’s looking unlikely that even this will materialise given that the US elections are drawing closer.
Janet Yellen in her speech on Monday warned about the impact of a Brexit on Interest rate decisions and I hold the view therefore that US Dollar weakness is likely to occur. The market has priced in 2 hikes for 2016 and in the event the UK left the EU, odds of a hike will diminish further.
A weaker US Dollar will most likely equate to stronger commodity currencies so it will be interesting to see how the Australian Dollar and Canadian Dollar will react to a Brexit.