UK’s pound en­dures one of its worst days

Daily Local News (West Chester, PA) - - MARKETPLACE - By Pan Pylas and Kelvin Chan

LON­DON >> The Bri­tish pound en­dured one of its big­gest falls ever on Fri­day — with some in the mar­kets blam­ing trad­ing ro­bots or a fatfin­gered typo for send­ing the cur­rency down a pre­cip­i­tous 6 per­cent in just a cou­ple of min­utes.

For one of the world’s ma­jor cur­ren­cies, which is held as a re­serve by coun­tries around the world, that’s a huge move, matched only by the pound’s fall in the wake of dra­matic events like Bri­tain’s June 23 vote to leave the Euro­pean Union.

Early Fri­day dur­ing Asian hours, the pound tum­bled from $1.2600 to as low as $1.1789 in the space of two min­utes, ac­cord­ing to fi­nan­cial data provider Fact­Set. It re­cov­ered since that clif­flike fall to trade at $1.24 later Fri­day. Still, that’s a level the cur­rency hasn’t seen since 1985 and way down on where it started the week, just be­low $1.30.

The crash oc­curred dur­ing a “twi­light pe­riod” in the mar­kets — af­ter the close in the U.S. and just as Asian traders were start­ing their day. That means the vol­ume of trad­ing was likely lower than usual, when rel­a­tively smaller trades can have an out­size im­pact.

Var­i­ous rea­sons have been cited for the drama in­volv­ing one of the world’s old­est cur­ren­cies. Some say a trader made a “fat fin­ger” mis­take while typ­ing in a mar­ket or­der. Oth­ers say it could have been an au­to­mated trad­ing al­go­rithm that makes de­ci­sions based on news web­sites or so­cial me­dia, or com­ments by France’s pres­i­dent, Fran­cois Hol­lande, who said Bri­tain should pay for its de­ci­sion to leave the 28-na­tion EU.

It could be com­bi­na­tion of them all — the Bank of Eng­land is in­ves­ti­gat­ing.

“In­ves­ti­ga­tions are un­der­way but a sin­gle rea­son may never be iden­ti­fied for last night’s ‘flash crash’’’, said Mike van Dulken, Head of Re­search at Ac­cendo Mar­kets.

The move trig­gered re­minders of the “flash crash” that the Dow Jones in­dex in New York suf­fered on May 6, 2010, when it dropped 1,000 or so points in a mat­ter of min­utes. Sev­eral po­ten­tial causes have been cited for that crash. One in­volves a Bri­tish fi­nan­cial trader op­er­at­ing from his par­ent’s home in west Lon­don — Navin­der Singh Sarao, the so-called “Hound of Houn­slow,” who is still fight­ing ex­tra­di­tion charges to face trial in the United States for fraud and ma­nip­u­lat­ing the mar­ket. Sarao de­nies any wrong­do­ing.

The dif­fer­ence with that Dow de­scent is that the pound is al­ready in the dol­drums, post­ing a se­ries of new 31-year lows against the dol­lar this week as traders fret over the un­cer­tainty sur­round­ing Brexit, the Bri­tish de­par­ture from the EU. Although the Bri­tish econ­omy has held up bet­ter than ex­pected in the im­me­di­ate af­ter­math of the “leave” vote, there are great long-term un­cer­tain­ties sur­round­ing the Bri­tish econ­omy.

The main worry in the cur­rency mar­kets cen­ters on what a clean Bri­tish break from the EU, which is look­ing like the pre­ferred op­tion of new Prime Min­is­ter Theresa May, would look like.

May this week said she would in­voke by the end of March Ar­ti­cle 50 of the EU treaty, the mech­a­nism by which two years of talks on Bri­tain’s exit of­fi­cially com­mence. She also ap­peared to sig­nal that her govern­ment would pri­or­i­tize con­trols on im­mi­gra­tion over ac­cess to the Euro­pean sin­gle mar­ket, an ap­proach in­for­mally called a “hard Brexit.”

The im­pact of leav­ing Europe’s sin­gle mar­ket could be felt far and wide in Bri­tain. Lon­don’s pre­em­i­nent fi­nan­cial ser­vices com­pa­nies would lose au­to­matic ac­cess to op­er­ate in the other EU coun­tries. And for­eign firms like car­maker Nis­san could halt in­vest­ments or even aban­don their Bri­tish bases in fa­vor of new ones within the Euro­pean sin­gle mar­ket.

Jane Fo­ley, se­nior cur­rency strate­gist at Rabobank In­ter­na­tional, said the heart of the pound’s prob­lems, re­gard­less of fat fin­gers or ro­botic trad­ing, is con­cern over this “hard Brexit” ap­proach. She said the out­look for in­vest­ment “looks likely to sour” if the coun­try is out of the sin­gle mar­ket.

“Since the U.K. runs a sig­nif­i­cant cur­rent ac­count deficit — 5.3 per­cent of GDP in 2015 — the pound is heav­ily ex­posed to down­side risk on a drop in in­vest­ment flow,” she said.

His­tory shows that Bri­tish gov­ern­ments have often changed tack due to sharp move­ments in the cur­rency mar­kets. In 1992, the Bri­tish pound suf­fered sim­i­larly dra­matic losses as it crashed out of a fixed ex­change-rate sys­tem that was then op­er­at­ing in Europe. The govern­ment then aban­doned the Ex­change Rate Mech­a­nism and ploughed a new eco­nomic path.

Bri­tain has a float­ing cur­rency now, so the im­pact on the coun­try isn’t as acute — a drop in the pound helps some parts of the econ­omy, like ex­porters. But if the pound falls much fur­ther, say to­ward a 1-to-1 value with the euro or the dol­lar, then the pres­sure may turn more acute on Bri­tain’s Con­ser­va­tive govern­ment.

Fri­day’s tem­po­rary crash has prob­a­bly added to wor­ries over the cur­rency and that could prompt fur­ther selling in the days and weeks ahead, re­gard­less of what the un­der­ly­ing Bri­tish eco­nomic data sug­gests.

“The pound push­ing ‘on an open door’ looks like a pa­thet­i­cally weak de­scrip­tion of a house that has lost its foun­da­tions,” said Alan Ruskin, a se­nior for­eign ex­change strate­gist at Deutsche Bank.

Ruskin added it is “far from clear that the slump is nearly over, now that the fi­nan­cial mar­kets have laid out a chal­lenge to the U.K.’s lead­er­ship on their lat­est ‘vi­sion’ of Brexit.”

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