Brexit is one of the biggest economic and financial risks in 2016. Our base case is that the UK votes to stay in the EU. We have written about the implications for the UK and GBP should the UK decide to leave the EU. (See, for example The UK's EU Referendum: Brexit - what if , 22 February 2016, and FX Strategy: Hedging EUR/GBP exposure in a Brexit risk scenario , 9 March 2016).
In this presentation, we lay out our take on the economic and financial implications for Europe with a particular focus on the Nordic region if the UK were to leave the EU. We analyse how a likely recession in the UK could spread to the eurozone and the Nordic countries, how central banks might respond and the implications for FX, rates and equity markets.
We look at asymmetric market views and hedging ideas which appear right, in our view, no matter whether we have a Brexit or not. Several views stand out. First, we expect EUR/USD to fall over the coming 3M on relative rates with or without a Brexit. Second, downward pressure on EUR/DKK is likely to remain independent of the Brexit risk due to the tight liquidity situation in the DKK money market and the cheapness of Danish fixed income assets. Finally, downward pressure on core euro yields should remain, where a Brexit will only add further fuel to the low eurozone inflation expectations and a likely upscale of the ECB's QE programme.
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