9th September 2014
Alex Plester, a senior foreign exchange broker with City firm VFX Financial plc, examines the turbulent events in the currency markets as polls show a surge of support for Scottish independence.
Investors currently holding dollars must be rubbing their hands together at present. Not only do they see their currency going from strength to strength on the back of an improving US economy but elsewhere they see the single currency imploding as it looks to weaken at every corner and now problems for sterling, the recent darling of the currency markets has decided to join the kamikaze currency gang by the looming prospect of the UK dismantling itself. From the point of view of holders of sterling, not the best start to the week by any means as the continuing prospect of volatility in currency markets looks likely as we get closer to next Thursday, (Scottish referendum day). Uncertainty in what the outcome will be is driving currency markets at present, with Asian investors taking the lead yesterday by dumping the pound. Reports that Nomura has told its clients to slash financial exposure to the UK and brace for a possible collapse of sterling says it all really. Even if that does sound extreme, it only takes a few people to run for the exit door to start a panic. The pound has now fallen to its lowest level in 10 months versus the dollar and lowest in 3 months versus the euro. Overnight we heard that a second poll has shown support for independence has jumped, showing that next week’s referendum is on a knife edge and the poll at the weekend was not a one off. With only 10 days until the referendum, news of the YouGov poll at the weekend led to several billion pounds being wiped off the value of leading Scottish companies yesterday and the dramatic sell off in the value of sterling.
The greenback advanced to the strongest in almost six years versus the yen as Treasury yields climbed on speculation economic reports this week will back the case for the Federal Reserve to boost interest rates next year. Against the pound we saw GBP/USD trade below the $1.61 handle and versus the euro we saw the $1.29 handle breached. A gauge of the greenback rose to a 14-month high before U.S. data forecast to show jobless claims decreased and retail sales improved. The greenback looks set to break under the $1.60 handle versus sterling, possibly as soon as next Thursday and may advance to 110 yen later this year versus the yen. We have already seen the key $1.30 handle smashed versus the euro! The dollar has jumped 4.1% in the past three months, the best performer of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. Treasury 10-year yields climbed as high as 2.50% today, the most since Aug. 5. Higher U.S. yields are fuelling U.S. dollar buying and there looks to be further upside in U.S. yields, especially on the long end. The U.S. labour market is improving even though the August employment report was below expectations
More weakness in the euro was seen Monday as we started out the new week with EUR/USD falling below the $1.29 handle, the lowest level since July last year. There was some rest-bite for the euro versus sterling, as the UK currency tried desperately to self implode and scare off any reason why global investors would want to hold that particular currency, but even the prospect of the UK breaking up couldn’t help EUR/GBP for long. Normal service was resumed Monday afternoon as any gains the euro made versus sterling were quickly lost. Elsewhere, we heard from the ECB saying they could deploy additional measures if needed, days after the ECB cut interest rates to record lows and said it would purchase ABS’s to keep inflation from staying too low for too long. A fall in the value of the euro is also welcome by the ECB, as it would make exports cheaper and support a pick-up in the eurozone economy. More reasons not to be long of euros!
Alex Plester is a senior foreign exchange broker with City firm VFX Financial PLC. Working in the deliverable currency markets for the last 12 years, he has been helping clients save money on converting currency by showing them an alternative route which realises substantial savings on the exchange rate as well as fees, compared to their normal high street banks. His knowledge in financial markets has been acquired since 2002 and taken him from Kuala Lumpur back to the City where he has worked for two city FX brokers. He sees building relationships with clients as key when dealing with converting currencies and making overseas payments. VFX Financial have been helping clients make international payments since 2001. You can find out more including free advice on how to move funds internationally and FREE CURRENCY QUOTES at: www.vfxplc.com
This article is sponsored by VFX Financial PLC.