Brexit aftereffect on Australian dollar and warning from the Reserve Bank of Australia



The Brexit leave vote pushed down the GBP to a 31 year low and left the AUD reeling while wiping out $ 70 billion from the Australian stock-markets. The benchmark S&P/ASX 200 index lost nearly 3.35% on the news but recovered a little from the fall. The Australian dollar posted sharp losses on June 24, 2016 following the results of the Brexit referendum with AUD/USD falling as low as 0.7296 earlier on Friday. AUD/USD recovered a little and traded above the 0.74 line thereafter. The worst performers of the session on ASX were CYBG PLC (ASX: CYB) falling 17.19%, BT Investment Management Ltd (ASX: BTT) declining 13.99% and Henderson Group PLC (ASX: HGG) down 12% after the close on Friday. Falling stocks outweighed the advancing ones on the ASX. On June 24, 2016, the S&P/ASX 200 VIX that is indicative of the implied volatility of S&P/ASX 200 options, also shot up 14.29% to a new 3-months high. Investors fled the markets in panic on the news with the ASX 200 losing to a 2 and 1/2 month’s low and the All Ordinaries declined by 3.1%. Analysts said that the surprise result has changed the basics of global markets. There is still lot of uncertainty about what the implications of the exit for the UK. Meanwhile, the Australian Treasurer Scott Morrison said that despite the volatility in the financial markets, nothing changes the way the Australian government is going about its economic plans.


Australian Dollar/US Dollar FX Spot Rate (Source: Thomson Reuters)

Most of the sectors in the local market lost on the referendum outcome, other than gold companies because investors viewed gold as a safe haven and the price jumped 5% an ounce on the news. All the four big banks lost more than 3%, while the blue-chip mining companies BHP Billiton and Rio Tinto lost 7.9% and 6.5%, respectively. Among gold mining stocks Newcrest Mining and Regis Resources rose around 8-9% on the back of the stronger gold price. A number of Australian companies which have exposures to the UK lost, as exemplified above. Other stocks that got a taste of the brunt included Amcor, Domino’s Pizza and News Corp.

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Just couple of days before the Brexit, the Reserve Bank of Australia is learnt to have warned both the opposition and the government on the global and domestic implications of the British exit from the EU. Under caretaker conventions, the short briefing was conducted at the request of both major parties with the election on July 02, 2016 only a few days ahead. Briefings similar in nature have been received both by Coalition and Labour from the Australian Prudential Regulation Authority and the Treasury on the possible scenarios addressing concerns about volatility across the globe. Speaking in Sydney, Reserve Bank assistant governor Guy Debelle issued warnings about a liquidity squeeze if the UK decided to part company with the EU. He said the question was how much liquidity there is going to be in the market, and that the position is not clear. John Denton, the co-chair of the International Chamber of Commerce, said that other EU nations   could take advantage of the anti-migration settlement and threaten to leave. He also felt that there would be no benefits for Australia and there could actually be negative consequences.

On the other hand, Australian shares saw some recovery from Friday’s dive with the ASX 200 moving up 0.3% on June 27, 2016. The materials sector was 1.7% up with BHP Billiton and Rio Tinto surging 2.8% and 2.9%, respectively while Fortescue jumped up 6.4%. The big four banks were down by between 0.1% and 1.1% and financial stocks remain a drag. QBE Insurance was 6.9% lower and mentioned about the need to change its strategy on insurance premiums in Europe. Nevertheless, the actual scenario would take its due course to shape-up in terms of consequences on Australian economy.

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