Sterling
Although no one really knows what caused the Pound’s ‘flash crash’ on Friday morning, most investors are taking the extraordinary plunge as a warning for the future.
The UK government’s hard line on immigration means that Britain will almost definitely lose access to the single market in March 2019, when the two-year ‘Brexit’ negotiations are concluded. Statements over the last few days from German Chancellor Angela Merkel, French President Francois Hollande and European Commissioner Jean-Claude Jucker confirm this outlook. Traders have accelerated their selling of the Pound in reaction to this proposed ‘hard Brexit’ scenario, as they believe direct foreign investment flows will dry up and prompt the UK’s already unhealthy current account deficit to swell.
Forecasters are predicting further Sterling depreciations over the coming months, with GBP somewhat decoupled from economic factors and now more aligned with the political struggles of London and Brussels.
Euro
The Pound to Euro exchange rate slammed to a new six-and-a-half-year low on Friday as ‘hard Brexit’ anxieties contributed to a ‘flash crash’.
Whereas Sterling’s declines versus most of the majors came in the form of one almighty dip and then a 75% rebound, against the single currency Sterling actually sustained its losses without fighting back. GPB/EUR plummeted by over two cents on Friday and does not look capable of staging a recovery anytime soon.
Data in the UK showed that industrial production shrank -0.4% in August, disappointing forecasts of a +0.1% increase. Meanwhile, a separate report showed that the UK trade deficit widened from -£9.5 billion to -£12.1 billion. Bad news all round.
US Dollar
‘Cable’ lost as much as 10% during the early hours of Friday morning as a mystery occurrence set off a series of stop orders at psychologically significant levels.
It is believed that some algorithmic trading setups interpreted harsh words from French President Francois Hollande to spell bad news for the Pound. These automated trading machines then proceeded to sell Sterling rapidly, thus pushing GBP/USD down to levels that nobody dreamed it would reach this soon. This had the snowball effect of driving the Pound’s value even lower until the trading platforms could locate orders to complete the automated transactions.
Prior to the plunge, Sterling was trading at 31-year lows versus the US Dollar and having tumbled -10 cents initially, GBP/USD settled at a two-cent depreciation.
Data Stateside showed that a lower-than-anticipated 156,000 new jobs were created in September, which weighed on the ‘Greenback’ versus some of the majors, but not against the Pound. Despite the uninspiring NFP report investors still believe the Federal Reserve is on track to hike rates in December.
Canadian Dollar
The Pound to Canadian Dollar exchange rate lost over two cents in Friday’s ‘flash crash’ and tumbled to a fresh three-year low as market sentiment towards Sterling remained markedly negative now that UK government officials have outlined plans to pursue a future outside of the single market. GBP/CAD also suffered on Friday because the ‘Loonie’ benefitted from a bumper 67,200 rise in Canadian job creation, which far outpaced estimates of 7,500.
Australian Dollar
Sterling tanked to a new three-year low against the Australian Dollar on Friday after dipping in value by around three-and-a-half cents. The GBP/AUD plunge took place during the morning of the Asia-Pacific trading session, when market volumes are at the lowest. The remarks made by French President Hollande in the Financial Times that appeared to precede the crash were:
‘The UK has decided to do a… hard Brexit… There must be a threat, there must be a risk, there must be a price.’
Hollande’s statement, confirming that Britain will need to accept the free movement of people if it is to retain access to the free market for goods, was picked up by algorithmic traders and is believed to be one of the reasons behind the extraordinarily large Sterling losses.
New Zealand Dollar
GBP/NZD plumbed a fresh all-time low on Friday following a temporary ten-cent decline during the ‘flash crash’. The Pound ended the day around three-and-a-half cents lower than it began against the ‘Kiwi’.
Data Released
09:30 EUR Euro-Zone Sentix Investor Confidence (OCT) Medium 5.6