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Brexit: Treasurers Weigh the Impact on FX, Trade

  • By Andrew Deichler
  • Published: 6/15/2016
MINNEAPOLIS -- Tuesday morning Tom Hunt, CTP, AFP’s director of treasury services, asked members of AFP’s Treasury Advisory Group (TAG) if next week’s referendum on whether the UK should leave the European Union will impact them in any way.

One assistant treasurer for a major pharmaceutical company noted that there is still a lot of ambiguity over what could happen with trade relations. Furthermore, even if the UK opts to leave, any changes will not be immediate. “They still have two more years to come up with a new relationship,” he said. “So for two more years, it will be status quo most likely. And then it will depend on how they negotiate cross-border trade.”

However, once that happens, he does expect his company to feel the impact. “We have a lot of trade flows going between the UK and Europe, and all that is going to be affected by the new relationship. But the good thing is, we have at least two years,” he said.

A treasurer for an investment firm noted that her primary concern is the currency volatility that has emerged over the prospect of Brexit—volatility that will undoubtedly continue if the UK leaves. “We have a London office. We have euro-denominated management fees, but London is our largest operating center in Europe,” she said. “When we sat down and did our cash forecasting a year ago or two years ago, GBP was moving with the dollar.”

So at the time, the primary risk was the pound strengthening. “We hedged about 50 percent of our GBP needs,” she said. “So we stayed neutral on the currency. But it went completely opposite of what everybody was forecasting at that time. Brexit is out there, which was not even a word six months prior. So our GBP hedges have performed poorly, and I’m thrilled that I had 50 percent unhedged, because that’s what’s now performing. So to me, it just really highlights, across any currency in any market, you have no certainty at any point.”

The pharmaceutical assistant treasurer agreed that the biggest impact will be on currency volatility, even more so than trade.

Magnus Carlsson, AFP’s manager of treasury and payments noted that, when it comes to the EU, the UK has always been a little bit of an outsider. Because of the fact that the UK has kept its own currency, he believes the effects may not be as bad as many fear. “It would be different if one of euro-denominated countries leaves,” he said.

However, some experts believe that Brexit could have repercussions that will be felt throughout Europe, spurring other nations to also consider leaving. “I think it will certainly lead to Grexit; the Greeks have a lot of respect for Britain and a lot of them have a lot of money here as well,” said David Marsh, managing director and co-founder of the Official Monetary and Financial Institutions Forum (OMFIF), during a cash management conference in London in February. “And so, it will have a colossally bad dismantling effect on the European Union.”
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