Friday 28 October 2016

The sterling has regained some ground after hitting a three-decade low

Published 07/10/2016 | 07:33

By mid-afternoon yesterday, €1 was worth under 85 pence
By mid-afternoon yesterday, €1 was worth under 85 pence

Sterling recouped some losses after plunging to a three-decade low in Asian trade on Friday amid growing fears of a "hard" exit by Britain from the European Union, while Asian stocks fell as investors took profits from a recent rally.

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European markets were expected to open slightly higher with tiny gains forecast for Britain's FTSE, Germany's DAX and France's CAC.

The pound nosedived 9pc at one point to $1.1491 after crashing through key support levels, triggering a wave of selling. An early trade even lower than that was later cancelled.

But it quickly bounced and it was around 1.2455 by early afternoon, still down about 1.3pc from late US levels and leaving traders scratching their heads in the absence of any major news overnight.

"This was even a bigger move than what we saw after the Brexit vote. There were almost no offers, no bids when this happened," said a trader at a European bank in Tokyo.

The pound has come under renewed pressure as fears grow that Britain's divorce from the EU will be messier and costlier for the economy than expected. UK Prime Minister Theresa May on Sunday set a March deadline for the formal departure process from the EU to begin.

"The whole thing's been on a precipice since Sunday, since Theresa May (pointed to) March Brexit negotiations, but the selling has been very substantial so you can only think its been part of that general punishment of the pound for Brexit," said Sean Callow, senior currency strategist at Westpac in Sydney.

"I think we've underestimated how many people had money positions for a very wishy-washy Brexit or even none. May's comments have really just started the cleanout and we just haven't seen any sign of bouncing."

While sterling's move broadly coincided with some news reports that Britain's separation from the eurozone may be a tough process, some traders blamed it on a possible a "fat finger" error triggering automatic stop-loss orders.

"A few stops got triggered in early trading and once cable broke 1.20, option barriers sent it lower," said Gerrard Katz, head of Asian FX sales and trading at Scotiabank said. "The broader market impact has been limited and cable should consolidate between the 1.20 and 1.25 levels."

Britain's finance minister Philip Hammond tried to reassure jittery markets on Thursday, saying the UK economy was fundamentally strong, but he acknowledged that next year will be "turbulent".

The sharp slide in the pound had little impact on other markets, though Asian stocks extended early losses as investors moved to the sidelines ahead of the US monthly jobs report later in the day. If job creation is robust, it may cement the case for a US rate increase in December.

Economists polled by Reuters forecast US nonfarm payrolls to increase by 175,000.

MSCI's broadest index of Asia-Pacific shares outside Japan and Japan's Nikkei both declined around 0.4pc.

Stocks in Hong Kong were down 0.5pc after data from China showed a third consecutive month of drop in foreign exchange reserves.

A disorderly reaction to possible US interest rate hikes could disrupt capital flows and heighten asset price volatility in Asia, the International Monetary Fund said on Thursday.

Elsewhere in currency markets, the dollar edged down 0.1pc against the yen to 103.80 after hitting its highest level in a month on Thursday.

The euro eased 0.3pc to $1.1120, poised to shed 1pc for the week.

The greenback held firm after data on Thursday showed the number of Americans filing for unemployment benefits unexpectedly fell last week to near a 43-year low, boding well for Friday's closely-watched payroll data.

Interest rate futures are now pricing in about a 65pc chance of a rate hike by December, compared to less than 50pc late last month.

The 10-year US Treasuries yield hit a three-week high of 1.746pc on Thursday before easing slightly to 1.73pc on Friday.

Gold hit a 3-1/2-month low of $1,252 per ounce, having declined 5pc on the week. It last stood at $1,258.8.

Silver has slumped more than 10pc so far this week to hit a four-month low of $17.1525 per ounce.

Oil prices steadied after US crude broke through $50 a barrel overnight, spurred by an informal meeting among the world's biggest producers on output cuts and falling US crude inventories.

US crude futures were little changed at $50.53, just below Thursday's four-month high of $50.63.


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