Brexit: Little Impact On Our Currency

The British people have voted to leave the European Union. So will this have any impact on Fiji and Fijians?  If so, how really and to what extent? Two ways
30 Jun 2016 12:19
Brexit: Little Impact  On Our Currency

The British people have voted to leave the European Union. So will this have any impact on Fiji and Fijians?  If so, how really and to what extent?

Two ways this will obviously impact us is in terms of trade and foreign exchange both of which are also interlinked. You might ask/wonder how so?

The uncertainty with the Brexit has led to depreciation of the British Pound. Sounds good right? Let’s hear the whole story before coming to any conclusions.

But, this also saw the US Dollar appreciating by 6.3 per cent against the British Pound on Friday, its biggest one-day gain since 1967.

This is surely good news for American travellers but bad news for US businesses that sells their products overseas.

For Fiji, the US is a much bigger trading partner for us than UK. Thus, while the Brexit might not affect our financial markets or currencies directly, it will affect us through its impact on US and the US dollar.


Foreign exchange

We interviewed the Reserve Bank of Fiji Governor, Barry Whiteside, who better explained whether or not there will be any impact on our currency.

Mr Whiteside explained the Fijian dollar is pegged/fixed to a basket of currencies which are its major trading partners. These are US dollar, New Zealand dollar, Australian dollar, Japanese Yen and the Euro.

What this means is using a special formula, the RBF calculates the official exchange rate for the Fijian dollar, taking into account exchange rates for the currencies of our major trading partners.

The weights of each currency in the basket are determined by our trade with these countries.

Therefore, Mr Whiteside said whatever happens to the currencies of our trading partners, will impact us a little bit.

He, however, stressed the impact would not be very significant.

“So if the US dollar is appreciating against the Euro and Australian Dollar, we will also be appreciating or pulled with the US dollar against the Australian dollar and Euro. So the AUD and Euro will weaken against us,” he said.

On whether or not the Brexit will affect our currency, Mr Whiteside said this would be sort of like a cushioning effect where it can strengthen as well as weaken.

But, he emphasised that he did not see too much impact on our currency in the near term.

This, he said, was because for UK to exist the European Union, would itself take some time and won’t happen overnight.


Trade and financial markets

While globally, Brexit has started impacting the financial markets, Mr Whiteside said they do not expect our financial markets here to take a hit.

As for trade, it might still be too early to say whether or not there will be much impact.

Tate & Lyle is a London-based company which buys bulk of our sugar currently where we get preferential access and pricing under the EU arrangement.

But this too is coming to an end on October 1, 2017. And for UK to exit the EU, it would take at least two years as per the exit clause.

But this also means our Government will need to start having separate discussions with the British Government in terms of trade conditions.

This is because even though our trade with UK may not be as large as with Australia and New Zealand, it is still an important enough market where our exporters are already exporting to.


US Dollar impact

Meanwhile, the CNN quoted an expert saying the biggest impact economically for the US would be the dollar impact.

Matt Lloyd, chief investment strategist at Advisors Asset Management, said a strong US dollar makes company’s products in USA more expensive and less attractive to buyers outside the US.

This would hurt sales for tech giants such as Apple, equipment makers like Deere and Caterpillar and global brands like Coca-Cola and Nike.

It’s one of the key reasons why Corporate America has been in an “earnings recession” with profits declining three straight quarter on an annual basis.

“If the dollar surges on Brexit for any period of time, then you’re going to see fears of the profits recession lasting longer,” Mr Lloyd said.

In short, a stronger dollar typically lowers US exports.

So if the dollar continues its post-Brexit gains, it would spell bad news for US trade and manufacturing, which is just digging out of its hole from last year.

The CNN also reported a stronger dollar could make imported items cheaper for US consumers, which could offset consumer fears about volatile global markets.

But at this point, fears of a stronger US dollar appear to be outweighing positives of it.


Edited by: RACHNA LAL


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