The Brexit vote has caused the loonie to plummet and has left many Canadian stockholders running. Britain’s decision to leave the European Union has upset the global market greatly due to the unprecedented nature of this event.
The Canadian dollar dropped to $76.28 cents US, after initially dropping $1.37 US on Friday and dropping another $0.65 cent US on Monday. This is a substantial currency loss and has put the TSX stock market into a frenzy. The Canadian dollar is expected to continue dropping to approximately $ 0.74 cent US over the next three months due to turmoil in the market over the uncertainty surrounding the Brexit vote. At the same time, many financial experts are expecting the market to re-stabilize because market overreaction is a typical response when a great global shift occurs.
Britain’s vote has left Canada in a precarious economic position as well, as our country has strong trade relations with Britain. Though many financial consultants are stressing that the market will stabilize, others are concerned for the future of the North American market. Canadian and U.S markets rely on Britain as a primary communicator to the EU for trade relations.Without this point of contact, trade relations may become more difficult as the British middle man pulls out of the EU. The free trade agreement between Canada and the EU called CETA has already seen resistance from other European countries since Brexit. London is also the base for Canadian banking operations and this decision may put them at risk.
Another concern is what will happen to British stock portfolios when the country separates from the EU. The EU passport that accompanies several stock portfolios in the country create higher value when considering trade options. Without unlimited access to the other countries in the EU, people are looking to sell their stocks. When the market falls out of balance with panicked stockholders looking to jump ship, it becomes threatened and could cause further instability to the market.
Before the vote occurred on June 23, the British pound was trading at $1.50 US. The pound now stands at $132.40, a 31-year low for the country. The severe drop of the pound is causing reverberations throughout England and it is unclear whether recovery will be possible once they leave the EU. There are rumours circulating that the Bank of England will soon cut interest rates to try and help stabilize the market. Cutting interest rates would help lower costs to investors while their stocks plummet, but will not be enough to restore the pound to its pre-Brexit value. The Royal Bank of Scotland had their shares halted after declining 15 per cent, and the Euro dropped six per cent as well.
Other “glass-half-full” investors urge Canadian to buy the cheap stocks while they are hot, as panicked stockholders will sell cheaply when the economy temporarily drops. The TSX market was down a whopping 210 points to 13,681 in the afternoon on Monday, reflecting that Canadian stockholders were panicking. Bank stocks swung the market heavily because they dominate the TSX stock market, and are easily affected by global impacts.
Another potential plus is the impact on the US economy. Wall Street experienced its worst day on the market in the last 10 months and this might push the US Federal Reserve to delay increasing interest rates as previously planned. This would be helpful to the Canadian economy as it would make stock options cheaper in the US, but could potentially continue to drive housing prices upwards due to low interest rates in both countries so it is difficult to foresee if this is positive or not for Canadians. The Brexit vote also creates a more nationalistic tone in global trade relations and could hurt the potential for the Trans-pacific Partnership, an important trade deal for Canada.
One of the reasons that British citizens opted to leave the EU was to help their economy. It was argued by Brexit supporters that the taxes demanded by the EU were too high, and maintaining a private economy would be more profitable for the country. The plummeting pound and unstable British market has clearly proven otherwise. Leaving the EU will weaken the British economy tenfold and leave it without valuable EU trade partners in the global market.
This EU exit is unprecedented in history and its impacts to the future are unknown — but clearly it will be dark days ahead for the British economy.