Rand below R14.50 vs the dollar ahead of Brexit vote

The South African rand eyed a consolidated move below R14.50 against the US dollar ahead of a British referendum on whether to remain a part of the European Union (EU), on Thursday.

The latest opinion polls in the UK indicate that the result could go either way, meaning many investors are likely to sit nervously on the sidelines.

The currency is trading at its strongest levels against the dollar since May 3, according to Thomson Reuters data. By 11:20am, the rand traded at R14.41 versus the dollar. It was at R21.40 against the pound, and at R16.42 to the euro.

“Markets are expecting a ‘remain’ but further rand gains are possible even so,” Rand Merchant Bank analyst John Cairns said in a note.

“Unofficial exit polls will be available through today. These could cause some nervy, jumpy trade this afternoon but global markets are likely to be illiquid and in wait-and-see mode.”

Mark Appleton, SA strategy head at Ashburton Investments said that nobody knows for sure what the real economic effects of Brexit will be although many economic think tanks suggest that the UK economy would certainly be worse off especially in the shorter term.

“This event is likely to cause dollops of uncertainty which depletes business confidence and in turn inhibits private sector investment and saps economic vitality. Markets don’t like uncertainty. Investors will likely demand higher risk premiums and that puts downward pressure on risky assets,” Appleton said.

Ashburton Investments said that should a “leave” vote become a reality on Thursday, one could expect the following:

  • Weaker global equity markets;
  • The FTSE would weaken although a lot of companies in this index would benefit from Sterling weakness;
  • A weaker Euro stock market although this market already looks “relatively” cheap;
  • A weaker US market but not to the same degree as the Eurozone and UK although this market is regarded as “relatively” expensive;
  • A weaker Sterling and Euro against the US Dollar with Sterling showing the greatest depreciation;
  • Lower yielding US treasuries and German bonds as being the “risk off” destination of choice;
  • European peripheral country bond yield spreads widening on a greater probability of a Euro “break up”.

Appleton said that if the vote is to stay, the opposite of the above is likely to happen, although the moves will probably be somewhat less marked as the probability of “remain” seems to be priced by the market as being higher than “leave”.

“From a South African perspective any weakening of the global economic environment or increase in ‘risk off’ sentiment cannot be seen as a positive. Export performance could suffer and the currency would likely become more volatile,” Appleton said.

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Rand below R14.50 vs the dollar ahead of Brexit vote