June 22, 2016

Simon Derrick: A Guide to the UK’s EU Referendum

Written by: Simon Derrick | Chief Currency Strategist, BNY Mellon

Simon Derrick

Simon Derrick

What will the referendum be on?

  • The UK government and parliament have accepted the Electoral Commission's September 2015 recommendation that the question should be: "Should the UK remain a member of the EU or leave the EU"?

Who can vote?

  • British, Irish or Commonwealth citizens over the age of 18 and residents of the UK are eligible to vote. UK nationals that have lived overseas for less than 15 years are also eligible to vote.

Referendum day (Thursday, June 23)

  • Polls open at 0700 and close at 2200.
  • No exit polls can be published while polling stations are open. However, private exit polls can be commissioned.1
  • YouGov's Anthony Wells reports on his website: "There will not be an official exit poll for the referendum. At general elections the BBC, ITN and Sky normally jointly fund an exit poll. The fieldwork is normally conducted by Gfk and Ipsos MORI, and then John Curtice, Steve Fisher and the rest of their team use the data to project seat numbers. This did not happen for the Scottish referendum or the AV referendum, and it won't be happening for the EU referendum either."2
  • Reuters reports that "the majority of counting areas are expected to declare between around 0100 and 0300 on June 24. The last declaration is expected around 0600. These local totals will be collated into totals for 12 regions, and then a final, national, result. The final result will be announced in Manchester by Jenny Watson, who is the Chief Counting Officer."3

Historical data
Top 5 one day declines in the value of the British pound (GBP) against the US dollar (USD) since 1971.

  • 1 November, 1978: -4.31%
  • 16 September, 1992: -4.29%
  • 5 January, 1978: - 3.99%
  • 20 January, 2009: - 3.85%
  • 11 December, 1985: -3.41%

Bank of England

  • Minutes of the latest meeting of the Monetary Policy Committee held on June 15 emphasise that the referendum is the largest immediate risk facing British financial markets. They add: "Through financial market and confidence channels, there are also risks of adverse spill-overs to the global economy." They also note that it is "increasingly likely" that GBP would fall further after a vote to leave the EU, perhaps sharply.

The European Union

  • A poll by IPSOS/Mori published on May 9 found that "the idea that [a UK exit] might start a domino effect with other countries leaving the EU [after a successful exit vote] is shared by around half (48%) of those in the researched EU countries, and is only slightly less prevalent in countries outside the EU (42%).”4
  • The same survey showed that 58% of Italians polled believed that Italy should hold a referendum on EU membership and that 48% would vote to leave. 55% of French respondents said they would like a French referendum and 41% said they would vote to leave.

Intervention/liquidity provision
As reported by various Reuters sources in June 2016.

  • Officials "with knowledge of the matter" indicated that "the European Central Bank would publicly pledge to backstop financial markets in tandem with the Bank of England should Britain vote to leave the European Union." According to an anonymous "senior central bank official"… "there will be a statement to do whatever it takes to maintain adequate market liquidity."
  • Swiss National Bank Chairman Thomas Jordan noted that Switzerland is highly exposed to developments abroad and that the referendum "may cause uncertainty and turbulence to increase." He added: "We will be monitoring the situation closely and will take measures if required." He noted that the bank does not have any specific exchange rate target but the goal is to have a stabilizing impact if there is a vote to leave.
  • Japan's vice finance minister for international affairs, Masatsugu Asakawa, told reporters (after a regular meeting between senior officials to discuss financial markets) that he shared the view with his counterparts from the Bank of Japan and the Financial Services Agency that volatility is heightening in the currency and financial markets. He said that they agreed to closely communicate with each other while closely watching the markets. When asked whether they discussed a contingency plan in the event of EU referendum related market turmoil he said: "It is up to Britain whether a Brexit would happen. We did not necessarily discuss concrete responses on the basis of hypothetical situations."
  • A "source familiar with the matter" stated that the Bank of Japan is ready to offer USD funding alongside  five other central banks (including the Bank of England and the European Central Bank) if financial markets are disrupted by the EU referendum in the UK.
  • Bank of Canada Governor Stephen Poloz says "we are standing ready for some possible market volatility in wake of [a UK/EU referendum] vote."

Longer term

  • During GBP's decline against the USD in 1981 and then again in both 1992 and 2008, the currency managed to lose 25% or more over a six month period. Even more minor moves (1975, 1976, 1989, 1991 and 2010) saw declines in the region of 15% over a period of half a year.
  • The losses seen for GBP in 1981, 1992 and 2008 came when the currency had been trading at elevated levels against the USD.
  • Other than during 1984 and 1985, the lowest daily close recorded was USD 1.3725 on 11 June, 2001. Since then the lowest close came on March 10 2009 at USD 1.3746. The lowest close seen this year has been USD 1.3868 on 26 February.

Does GBP's performance ahead of a major political event tell us a great deal about what will happen afterwards?

  • GBP proved highly sensitive to the changing expectations of a coalition government ahead of the general election in 2010 (with GBP losing ground when expectations of a coalition rose). However, GBP trended steadily higher in the aftermath of the election despite the formation of a coalition government.
  • The broad expectation ahead of the referendum in Scotland in 2014 was that a vote to remain in the UK would be positive for GBP. However, GBP strength in the aftermath of the Scottish referendum was fading just hours after the result became clear.




Malcolm Borthwick
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