Canada after the Brexit vote: Part 2

In the face of the sudden uncertainty – the markets had expected Britain to remain – the stock market lost $2 trillion the day after the vote as investors fled to the safety of gold, the USD and Japanese yen. Fears of a U.K. recession and the uncertain future of London as a major EU financial centre led the flight out.

Commodity prices also plunged following the vote. Prospects of weaker demand for oil in the future due to unrest in the world economy led the financial markets to push oil prices down. However, Bloomberg suggests that with oil's current global oversupply, the fall in demand will have a negligible impact on long-term growth and oil may rebound to $50/barrel by Q4 2016 and $60/barrel in Q4 2017.

IMPACT: Overall trade will weaken on the basis of a slowdown. Prices for ag commodities have already dropped on the basis of weaker expected demand. The economic slowdown may lead the U.S. Fed to delay plans to raise rates in 2016. Other major central banks have suggested the possibility of taking steps to ensure liquidity in the markets. All these actions impact currency values. The loonie declined as the USD continues to climb. Our currency also lost value against the Japanese yen. This should improve the competitiveness of Canadian exports in our major agri-food export markets.

Europe, Britain and Canadian agriculture

The Comprehensive Economic Trade Agreement (CETA), signed by Canada and the EU in 2014, is not yet ratified. Europe had plans to approve and ratify the deal in 2016, the timing of which may now be in jeopardy.

It's an important market and one that may grow. In 2015, Canadian exports to the EU accounted for 6% of Canada's total ag and agri-food exports. Within the EU, the UK was the largest individual importer of Canadian ag and agri-food products in 2015 with 17% of all exports to Europe.

Still to come

The EU is facing significant challenges in maintaining solidarity among members, as populist sentiment overwhelms EU policies. Britain also faces a major internal issue as Scotland and Northern Ireland discuss the possibility of separation from the U.K. Each voted to remain in the EU.

How the EU decides to handle the British break-up is seen by some to be the litmus test for other countries with similar ideas. Jean-Claude Juncker, the President of the EU Commission, has stated maintaining the bloc, even at the expense of business across borders, is the goal of the EU.

What to watch:

  • Both the equity and debt markets
  • Impacts to oil and ag commodity prices
  • Further threats to long-term geopolitical stability in the EU and the U.K.
  • EU/UK/CA talks on CETA
  • USD/CAD exchange rate and other major currency markets

For more on Brexit: Buckle up and brace yourself