How the referendum in the United Kingdom may affect UAE?

Hours before the opening of referendum, the British pound hit a six-month high against the US dollar

At 10am UAE time today, British citizens started voting for the referendum for Britain to exit or remain in the European Union.

A vote by Britain to leave the 28-member EU has been dubbed ‘Brexit’ while those voting for a status quo are dubbed to be in the ‘Bremain’ camp.

Mere hours before the opening of referendum, the British pound hit a six-month high against the US dollar (and dollar-pegged currencies such as the UAE dirham) on hopes that ‘Bremain’ will trump ‘Brexit’ today.

While the results of the historic referendum will be announced tomorrow, analysts and financial experts maintain that the impact of an exit will be felt gradually and across the world.

Latest polls suggest a reduced fear of ‘Brexit’, pushing the pound sterling up at a six-month high against the UAE dirham. As of 9am UAE time today, £1 will fetch Dh5.43, compared with just Dh5.15 that it fetched same time last week, showing the pound has strengthened by more than 5 per cent in a week.

Voting will remain open for 15 hours, until Friday, 1am UAE time, and results will be announced later in the day tomorrow.

How will the vote impact us here in the UAE?

While ‘Bremain’ (status quo) won’t have a substantial impact, ‘Brexit’ will impact us in several ways.

For one, it will have a damning impact on the value of the pound sterling vis-a-vis the US dollar and the UAE dirham. That will not only impact British expats here, but also will affect the price of goods imported from England – cars like Jaguar, Mini, Aston Martin, Rolls Royce, Land Rover and Bentley will get affected.

The UAE also imports from the UK a host of goods in other sectors, such as telecommunications, power generating machinery and equipment, electrical goods, transport, office machinery, interior and retail goods and non-metallic mineral manufacture. All these will be impacted if the value of sterling fluctuates.

Billionaire investor George Soros has warned that a ‘Brexit’ vote could trigger a worse fall for the pound sterling than ‘black Wednesday’ – the day he forced Britain out of the Exchange Rate Mechanism almost a quarter of a century ago.

Writing in the Guardian, Soros said: “Sterling is almost certain to fall steeply and quickly if leave wins the referendum. I would expect this devaluation to be bigger and also more disruptive than the 15% devaluation that occurred in September 1992, when I was fortunate enough to make a substantial profit for my hedge fund investors at the expense of the Bank of England and the British government.”

Hussein Sayed, Chief Market Strategist at FXTM, reckons that “a Brexit vote is likely to be disastrous”.

In a commentary this morning, he said: “Many analysts were trying to predict the magnitude of sterling’s fall in case of a Brexit, whether it’s 10 per cent, 20 per cent or more than 30 per cent, all agree it’s going to be a severe one. In equity markets, banking sector will be hit the hardest, and will likely to see a double-digit drop in UK’s major banks [share prices].”

Stock markets could tumble too, sending investors scurrying to the safety of safe haven investment options such as gold and other precious metals.

In case of a ‘Brexit’ vote, the immediate impact on sterling will be that it will sink against the US dollar/UAE dirham. In the long term, different studies show a different impact on the UK’s and world economies, depending on which camp is promoting the study.

That markets don’t really expect a ‘Brexit’ can be seen from the fact that gold is falling and pound is gaining. Had the mood been any different, it would have been the other way round.

Even as a ‘Bremain’ vote seems to have been factored into today’s currency movements, it is not a given by any stretch of imagination, and the next 24 hours will decide which way the coin flips.

“For the next 24 hours, liquidity most likely to dry and big swings to be realized in all asset classes, but the real action to start after Thursday midnight when individual regions start to declare their vote counts, and will only have the final results by Friday early morning,” says FXTM’s Sayed.


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