The sad news of the terrorist attacks in Brussels dominated the headlines this week. The immediate reaction in the markets was to buy safe-haven assets such as the U.S. dollar and gold in a risk-off sentiment while global equities sold off.

However this reaction proved short-lived, as markets quickly seemed to assume we were back to business as usual.  

What persisted after this news, however, was the weakening of the British pound sterling. Investors immediately shifted their sights and began to take the possibility of a Brexit more seriously: Consequently, the GBP has hit a two-year low and is stuck there for now.

The term Brexit refers to the possibility that Britain could exit the European Union. As we’ve mentioned before, a referendum on Britain’s continued membership in the EU will take place on June 23. Opinion polls still show the pro-EU votes to be slightly ahead, but the markets don’t seem to trust those polls.

Just two weeks ago, Bank of England (BOE) Governor Mark Carney said that the EU vote is his country’s biggest domestic risk to stability. According to analysts, a Brexit would heighten expectations for a recession and the BOE would need to add economic stimulus immediately, drawing up contingency plans so that banks would be able to continue to do their business and avoid an exodus of firms.

Those that favor a Brexit are defying economics, choosing political and philosophical views instead. Slogans such as ‘control our border,’ ‘make our own laws’ and ’get money back from Brussels’ are all easy to understand. While it is highly questionable whether those actions would be easy to execute, it is understandable that the recent attack in Brussels may be swaying voters in that direction.

The reality is that this topic, once considered a non-issue, is leading to increased fears of nationalistic movements rising up within Europe. French far-right leader Marine Le Pen called for an immediate closure of the French-Belgium border after the attacks and her popularity immediately went up.

A Dutch referendum regarding the EU’s Association Agreement with Ukraine will be another test on April 6. The Dutch parliament had approved visa-free travel for Ukrainian citizens into the EU, so if the referendum is rejected, that will be taken as a vote of non-confidence in the Dutch government. Should this happen, it would probably shake the euro, too.

My View: The rattling in Europe reinforces the fact that the U.S. dollar is the safest-haven currency for now. While immigration is a hot-button issue in the U.S., we certainly don’t have as much immigrant risk as Europe does. Clients who have exposures to the GBP may wish to consider possible foreign currency hedges.  

The information in this report was compiled by the staff at City National Bank from data and sources believed to be reliable but City National Bank makes no representation as to the accuracy or completeness of the information. The opinions expressed, together with any estimate or projection given, constitute the judgment of the author as of the date of the report. City National Bank has no obligation to update, modify or amend this report or to otherwise notify a reader in the event any information stated, opinion expressed, matter discussed, estimate or projection changes or is determined to be inaccurate. This report is intended to be a source of general information. It is not to be construed as an offer, or solicitation of an offer, to buy or sell any financial instrument. It should not be relied upon as specific investment advice directed to the reader’s specific investment objectives. Any financial instrument discussed in this report may not be suitable for the reader. Each reader must make his or her own investment decision, using an independent advisor if prudent, based on his or her own investment objective and financial situation. Prices and availability of financial instruments are subject to change without notice. Financial instruments denominated in a foreign currency are subject to exchange rate risk in addition to the risk of the investment. City National Bank (and its clients or associated persons) may, at times, engage in transactions in a manner inconsistent with this report and, with respect to particular securities and financial instruments discussed, may buy from or sell to clients or others on a principal basis. Past performance is not necessarily an indication of future results. This report may not be reproduced, distributed or further published by any person without the written consent of City National Bank. Please cite source when quoting.