Headlines
Stock markets plunge into the red
– Pound registers mammoth gains vs. commodity bloc.
GBP/EUR declines -150 pips
– Pound hits three-month low.
GBP/USD hits two-month high
– Sterling finally settles above resistance.
Pound hits eight-year high vs. ‘Loonie’
– GBP/AUD up 500 pips, GBP/NZD up 700 pips.
Pound Sterling
Turmoil in financial markets sent the FTSE 100 share index down -4.6%, or -£74 billion amid fears that a financial crash in China could lead to widespread contagion in global markets. The steep decline in British stocks took the FTSE to its lowest level for almost three years as the blue-chip index posted its tenth consecutive daily decline – its longest losing streak since 2003.
However, despite the negative consequences that weak Chinese growth could have on Bank of England rate hike projections the Pound managed to appreciate against most of the majors yesterday. The commodity bloc was predictably damaged by the risk-off mood, whilst the US Dollar also suffered as investors pushed back their Federal Reserve rate hike bets.
Euro
The Pound to Euro exchange rate tumbled by over -150 pips to a three-and-a-half-month low yesterday as investors continued to unwind from carry trades priced in Euros.
The latest shock to the financial system has persuaded investors to consolidate high-yielding, high-risk trades that were made with capital loaned at rock-bottom rates in Europe. This has had the dual consequence of strengthening the single currency and weakening the high-beta commodity bloc. It remains to be seen how many more carry trades can be unwound but with GBP/EUR five cents down over the past five days it is entirely possible that we could see a rebound in favour of Sterling before the end of the week.
The benchmark European stock index suffered £286 billion worth of losses yesterday, shedding -5.4% of value and representing its worst performance since November 2008.
US Dollar
After knocking at the door for a couple of weeks Sterling traders finally got the answer they were looking for yesterday as ‘Cable’ settled above key psychological resistance in reaction to the turmoil in global financial markets.
The Pound rallied by around 100 pips to strike a fresh two-month high as investors who had previously been holding out for a September rate hike from the Fed finally threw in the towel and accepted that tighter policy would have to wait. Despite remarks from a former Fed policymaker, Lawrence Summers, suggesting that the US central bank may actually choose to loosen policy in the foreseeable future the current consensus is that Fed Chair Janet Yellen will push for a rate rise this December.
The recent appreciation in Sterling opens the door to a run at June’s yearly high, so long as traders don’t start pushing back their BoE rate hike bets in reaction to the onslaught in equity markets.
The Dow Jones Industrial Average lost out on -585 points, or -3.5%, to mark the largest one-day fall since 2011.
Canadian Dollar
The Pound to Canadian Dollar exchange rate peaked at an eight-year high yesterday after rallying 200 pips on a day of drastic risk-aversion. Talk of another rate cut from the Bank of Canada intensified and the ‘Loonie’ succumbed to a new decade-low against the ‘Greenback’ as commodity prices plunged and oil struck its lowest level since February 2009.
Australian Dollar
The Pound rallied by a whopping 500 pips versus the Australian Dollar yesterday as commodity prices collapsed following a jaw-dropping -8.5% drop in Chinese equity prices. The Shanghai Composite index suffered its worst day of trading since 2007 and this dragged the Australian ASX down -4.1% as markets adjusted their portfolios to reflect the risk of further slowdown in the world’s second largest economy.
New Zealand Dollar
Sterling struck a six-year high against the New Zealand Dollar yesterday, registering a daily appreciation of 700 pips as traders dumped assets deemed susceptible to the Chinese crash. At one point GBP/NZD was actually up a ludicrous 1,800 pips on the day.
Data Released Today
09:00 EUR German IFO – Business Climate (AUG)
14:45 USD Markit US Services PMI (AUG P)
15:00 USD Consumer Confidence (AUG)