Brexit Warnings Mount, Could Weigh on ETFs

  • FXB, which tracks British pound against U.S. Dollar, lowers 3.4% in February
  • Loss attributed to upcoming referendum in Great Britain about European Union membership
  • Observers believe Great Britain’s departure from EU would be pound negative

The CurrencyShares British Pound Sterling Trust (NYSEArca: FXB), which tracks the movement of the British pound against the U.S. dollar, is lower by 3.4% over the past month. Essentially all of that loss can be attributed to currency traders’ concerns surrounding the upcoming referendum in Great Britain about European Union membership.

Last month, FXB hit an all-time low as speculation intensified that Great Britain’s departure from the European Union is a real possibility. Market observers almost universally believe such an event would be pound negative. Moody’s has warned that it could downgrade U.K.’s credit rating if the country leaves the union.

Some well-known asset managers and banks are chiming in, confirming that the pound and British stocks could suffer in the wake of a “Brexit.”

“BlackRock concluded that in its worst-case scenario a ‘vicious cycle of currency weakness, an abrupt stop to capital inflows and a sharp deterioration in market confidence’ couldn’t be ruled out,” reports James Mackintosh for MarketWatch.

By leaving the union, the UK would need to negotiate a new trade agreement with the EU that would preserve some of the trade benefits of EU membership. Consequently, without the union, UK exporters would be pressure. The depressed GDP growth and more difficult export conditions would impact sectors like financial services, exporters, retail and property, which would also have an adverse effect on British equities.