Currency markets suffer major volatility on “Black Monday”
25/Aug/2015 • Currency Updates•
Currencies around the world suffered from one of the most dramatic and volatile days trading in months on Monday after stock markets in the US, Europe, and Asia fell sharply. Fears of an economic slowdown in China continue to weigh on investors.
During Asian trading on Monday, shares in China tanked by close to 9%, their largest daily fall since the height of the financial crisis in 2007. This led to massive sell-offs in the FTSE 100, Dow Jones and major markets in Europe, with investors fleeing from riskier assets and piling into “safe haven” currencies of the Euro and Japanese Yen. The intense level of volatility quickly led to analysts dubbing yesterday “Black Monday”, with thin summer markets likely contributing to the sharp moves. As a result, all macroeconomic developments were completely overshadowed once again.
The UK currency declined to a one month low against its basket of currencies on Monday, despite gains of 0.7% against an under-pressure US Dollar. Sterling slumped against the Euro by 0.4%, in the process touching its weakest position against the single currency in over three months, while registering its most volatile days trading in six years.
Chancellor George Osborne attempted to allay fears while speaking during an event in Stockholm yesterday. Osborne claimed that he did not expect the slump in Chinese share prices to pose a real or immediate threat to the UK economy. While the volatility in China’s market was deemed a cause for concern, he claimed officials in Beijing were more focused on ensuring consumption-led growth.
Earlier, the Confederation of British Industry claimed that the UK is set to enjoy a “decent quarterly GDP growth”, upgrading its growth forecasts from 2.4% to 2.6% for 2015.
Trading today will no doubt be driven by investors repositioning, especially considering a second day of little economic indicator data out of the UK economy.
The single currency appreciated by as much as 2% against the Dollar at one stage yesterday, before ending the London session 0.9% higher.
The uncertainty caused by such dramatic and unprecedented declines in world share prices caused traders to pour into the Euro yesterday. The currency, along with the Japanese Yen, continues to rally in the face of global uncertainty, and is seen as a global “safe haven” currency, even more so than the US Dollar.
The Euro also continues to gain on reversals in “carry trades”. Ultra-low rates have in the past prompted investors to borrow the Euro to purchase currencies with higher returns. In times of financial stress, such as yesterday, investors flock back into the Euro, hence contributing to yesterday’s rally against its peers.
In terms of economic announcements today, German growth and business confidence figures this morning are worth keeping an eye on.
Despite gains against a host of emerging market currencies, the US Dollar index fell by 0.9% yesterday following sharp depreciation versus both the Euro and the Yen.
The global stock market rout meant that traders around the world began fretting that the Federal Reserve would refrain from raising interest rates in September. However, with a lack of signals from the US central bank, emerging market currencies are expected to continue to struggle against the US Dollar.
Meanwhile, the latest survey from the National Association of Business Economics, released yesterday, showed that 70% of those business economists surveyed still expected the Fed to hike rates at some point in 2015.
Fallout from yesterday’s developments will likely take centre stage today. In terms of macroeconomic releases, consumer confidence, new home sales, and service sector growth in early afternoon could also lead to moderate volatility.
Rest of the world
Unsurprisingly, the Australian Dollar and New Zealand Dollar, both of whose economies are heavily linked with China, suffered yesterday during the London trading session.
The sharp decline in share prices also caused oil prices to tank. Commodity driven currencies such as the Russian Ruble, Brazilian Real, and South African Rand all suffered from sizable depreciation, the later hitting an all-time low.