Looming Brexit vote shows why investors must treat currencies with caution
Viktor Nossek, Director of Research at WisdomTree Europe, assesses what might happen to currency and investment markets if the UK votes to leave.
“The impending vote on the UK’s future in Europe has seen sterling volatility spike to levels not seen since the financial crisis, driven by sharp intraday swings as investors’ nervousness around the pound’s value, gravitating around $1.46 to the US dollar currently, increases. While there has been a marked improvement for sterling in recent sessions, sentiment can swing rapidly.
“Indeed if the UK was to vote leave, the volatility experienced would be severe and we would expect currency and UK risk assets to come under intense pressure initially. Longer term, the risk of barriers to trade and investment worsening UK’s current and capital account balances would potentially put pressure on gilts. Rather than UK equities, which in large-caps are overwhelmingly multinationals with a global footprint that benefit from pound weakness, the government bond market would likely succumb the most to rising bearishness.
“By staying hedged until after the result of the referendum, investors can mitigate any further weakness for sterling in the event of a Brexit, whilst also retaining the flexibility to move back into unhedged investments if the vote for remain wins out.”