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Australian dollar falls against greenback as UK votes to exit European Union

Australian dollar falls against US currency as UK votes to exit European Union

The Australian dollar dropped against the US currency, but was buying more British pounds after the UK voted to leave the European Union.

The United Kingdom (UK) voted 52% to leave the European Union (EU) in what has become known as 'Brexit', compared with a vote of 48% to remain. At close of local trade on Friday:

  • AUD/USD down 3%
  • ASX 200 down 3%
  • GBP/USD at 30-year low
  • AUD gains against GBP

On the news of the poll result, the Australian dollar (AUD) fell to as low as US73.20 cents from US76.29 cents early Friday morning, according to data from Bloomberg, but was trading back above US74 cents by the end of the day.

The British pound (GBP) lost 8% against the US currency to fall to a 30-year low against the greenback (USD). The euro fell to its lowest level on record.

AUD/GBP moved from 0.51 pence to slightly more than 0.54 pence through the day.

The ASX 200 lost 3.17% to close at 5113.18 on Friday, with financial shares and the big miners leading the drop.

The result of the referendum opens the UK up to a process that is likely to drag on for more than two years and presents downside risk to global equity and commodity markets.

CommBank strategists had forecast in a note that a Leave vote would result in a “reassessment of the global economic growth outlook”, and now believe the decision will "slow growth and generate some capital flight".

The British Prime Minister, David Cameron, a strong supporter of the Remain campaign, resigned and said he would leave by October, enabling his successor to decide whether to trigger Article 50 of the EU Treaty to start the two-year exit process.

Policy makers immediately moved to calm nerves. The Bank of England (BoE) governor Mark Carney said the BoE was ready to provide GBP250bn of extra funding to ensure banks can continue to operate and support the orderly functioning of markets.

Overseas markets dive

On Friday, the Dow Jones Industrial Average closed down by more than 600 points, or 3.4%, led by a plunge in bank shares, and the FTSE 100 in London fell by 3.2%.

European stocks bore the brunt of the carnage, with the Stoxx 600 Index sliding 7% in its worst day since October 2008.

The yen briefly strengthened past US$100 for the first time since 2013 and Treasury yields had their biggest drop in more than four years.

Gold, often seen as a safe-haven investment during times of volatility and economic uncertainty, rallied above US$1300 an ounce.

Currency forecasts

Commonwealth Bank currency strategists said the GBP/USD exchange rate could fall further, having touched a low of US$1.3229 after the referendum vote was known.

"The AUD/GBP exchange rate is likely to further appreciate," CommBank said in a note.

"If the GBP/USD exchange rate overshoots to the downside as expected, we are likely to see AUD/GBP trade above 0.5500 (GBP/AUD below 1.8182) before year-end."

Negative for commodities demand

The magnitude of the effect on markets and economies remained "open to debate", but "it is hard to see the impact as anything other than negative", CommBank analysts said in a note.

"The UK will be most affected. But Europe (and the rest of the world) will not emerge unscathed."

They said that slower global growth will weaken commodity demand and a strong USD would depress commodity prices, impacting commodity producers such as Australia.

This article is intended to provide general information of an educational nature only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. Investors should consult a range of resources, and if necessary, seek professional advice, before making investment decisions in regard to their objectives, financial and taxation situations and needs because these have not been taken into account. Any securities or prices used in the examples given are for illustrative purposes only and should not be considered as a recommendation to buy, sell or hold. Past performance is not indicative of future performance. Commonwealth Securities Limited ABN 60 067 254 399 AFSL 238814 (CommSec) is a wholly owned but non-guaranteed subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945 and a Participant of the ASX Group and Chi-X Australia.