Should You Rush To Buy British Pounds Now That It's Cheaper After #Brexit?
It's official. On 24 June, the UK have decided to leave the European Union (EU) based on a 52% majority vote on the Brexit referendum.
Since joining the precursor of the EU (then called the EEC) in 1973, various political parties, advocacy groups, and even individuals have championed for the British withdrawal from the union, often shortened to Brexit (a portmanteau of "British" or "Britain" and "exit").
Calls for a referendum on the UK's EU membership bore went mostly unaddressed (barring the 1975 referendum) until UK Prime Minister David Cameron announced that an in-out referendum will be called before the end of 2017 if a Conservative government were elected in 2015.
The outcome of the referendum, which was voted on on Thursday, 23 June, came as a surprise to many, especially since most of the younger voters and even a majority of political parties were slanted towards Remain in opinion polls. Although results of a referendum are not legally binding, the Parliament will likely abide by it.
Not long after the results were made official, UK PM David Cameron announced his resignation. It's even more bad news for the UK as the Sterling Pound fell more than 10% from USD1.47 to USD1.32, its lowest since 1985, after Brexit.
In a single night, the British pound plunged to its lowest point in 31 years. According to Bloomberg, this is the pound's worst day on record, far surpassing the second worst - in 1992 when the currency fell by 4.1%.
UK, widely recognised as the world's fifth largest economy, has since been overtaken by France.
Against the Malaysian ringgit, 1 British pound slumped to a two-month low of RM5.46 as Britain voted to exit EU this morning
To compare, the pound has been traded at an average of RM5.90 since January 2016, with RM6.44 being its highest on 6 January.
It has since risen to RM5.63 as of 3.04pm today, 24 June.
Now, should you run to the nearest money changer right now to buy all the Sterling pounds you can afford? Here are some points to ponder:
1. With much uncertainty surrounding the aftermath of the Brexit referendum, some analysts have speculated that the British pound could continue to drop in the coming days
Word on the street is that the British pound is poised to slump to RM5.20 and even as low as RM5.00.
2. After Brexit, the Malaysian ringgit is said to be heading to its worst slump since the Asian financial crisis in 1998, having gone gone down 2.7% against the US dollar
USD1 is now valued at RM4.12 as of 12.36pm today, quite a significant difference from when it rose to a seven-week high of RM3.99 prior to Brexit.
Despite the rising rates against the US dollar, analysts say that the ringgit's depreciation will have minimal impact when put against the British pound (which registered a bigger value gap against the USD). In short, you may be paying more for US dollars, but the British pound might still be cheaper due to its quicker and bigger plunge in value.
3. UK's surprise exit from the EU has brought upon many other questions surrounding the future of its economy, which in turn resulted in a lot of uncertainty among investors
The UK's impending exit from the EU is an unprecedented one - no country in the union has elected to do so before - which might bring about unforeseen political and economic crises. In fact, the unexpected results of the Brexit referendum has evoked more questions - Will Scotland, who voted to Remain, exit the UK? Will other countries in the EU follow suit? How will UK cope with the aftermath of Brexit, both politically and economically?
In the face of these uncertainties, investors will probably choose to invoke risk off mode for the time being to avoid having to manage any potential risks associated with the UK until the situation has stabilised. With that said, the UK will only officially exit the EU in two years, so there is still time for them to realign.