There has been a lot of volatility in the foreign exchange market this morning, driving currencies to historic levels:
GBP/USD – 23 Year Low
USD/JPY – 13 Year Low
NZD/USD – 6 Year Low
EUR/JPY – 6 Year Low
CAD/JPY – 13 Year Low
GBP/JPY – Record Low
NZD/JPY – 8 Year Low
The most significant moves have been in the British pound, which fell to a 23 year low against the US dollar and in USD/JPY, which fell to the lowest level in 13 years. Comments from former Fed Chairman Volcker triggered a wave of risk aversion that led to a technical break in the currency market. He said “we are in serious recession, with no end clearly in sight.” Although there is no question that the US economy is in trouble, by saying that there is no end in sight means that there is no hope which coming from the chairman of Obama’s newly formed Economic Recovery Advisory Board is significant. By saying that he does not an end to the recession is certainly not good advice. Treasury Secretary Nominee Geithner expects an Obama economic stimulus plan to be released in the next few weeks but unfortunately Volcker’s comments overshadowed the prospect of a stimulus plan. Yesterday’s sharp sell-off made investors nervous but Volcker’s comments pushed them over the edge.
We are continuing to see flight to safety into the US dollar and Japanese Yen. Investors are looking to hide in the lowest yieldind currencies.
We also had comments from ECB President Trichet and SNB President Hildebrand. Trichet defended the ECB’s monetary policy and said they haven’t decided if 2 percent is the lowest level for rates.
Intervention by Swiss National Bank?
The Swiss franc collapsed after SNB Hildebrand said that the central banks is considering selling francs to halt the currency’s gains. With interest rates already at 0.5 percent, they have no room to ease monetary policy. Therefore they may have to resort to fixed rate currency intervention.
The British pound has fallen to a 7 year low against the US dollar and a record low against the Japanese Yen. Over the past 3 trading days, the GBP/USD has dropped more than 1000 pips or 7 percent. Consumer prices were hotter than the market expected, so what has fueled this aggressively selling?
One answer – FEAR
The market is afraid that the UK will turn into the next Spain or Greece. Over the past few months, they have been working overtime to inject more stimulus into the economy, but the more that they spend, the worse impact it has on the UK’s fiscal position. Deteriorating public finances has been the primary motivation for the recent downgrades of sovereign debt ratings by Standard and Poor’s. The FSA has dismissed this rumor but that doesn’t mean that the UK can’t be put on credit watch negative which would be one step before a downgrade. Investors are selling now and asking questions later because a downgrade would mean more losses for the British pound. Whenever a country loses its AAA rating, funds that are mandated to invest in only AAA assets need to liquidate and shift their positions elsewhere. We have seen this with Spain and could see it again with the UK.
Bank of England Governor Mervyn King will be speaking later today and he will probably attempt to calm the markets. But with employment data and the minutes from the latest monetary policy meeting due for release, his impact may be limited.
How Low Can the GBP/USD Fall?
The British pound has broken 2 key support levels – 1.45 and 1.40. Trends can last for a very long time in the currency market which is why there is a decent chance that we could see the GBP/USD slip to 1.3685, the June 2001 low. If that price level is broken, it would be a 16 year low for the currency pair. The 1.40 level is pretty critical on a closing basis. If the GBP/USD closes above 1.40 today, we may actually see a larger bounce, but don’t expect the currency pair to revisit the 1.45 level any time soon.
Monthly Chart of GBP/USD:
Most currency traders only have their eyes on the “majors” such as EUR/USD, USD/JPY, and the GBP/USD. Admittedly, these are the most liquid currency pairs, but sometimes opportunities could be missed if you are not also looking at the crosses. Trends are usually more powerful in the crosses than the majors and you may not have realized that some currency pairs hit multi-year lows today on an intraday basis:
GBP/JPY: fell to a 13 year low
NZD/JPY: fell to a 7 year low
CHF/JPY: fell to a 6 year low
On the upside:
EUR/GBP: hit a RECORD high
EUR/NZD: hit a RECORD high
Here are pairs that are closing in on significant levels
USD/JPY: 125 pips from 13 year lows (needs to break 90.92)
USD/CAD: 250 pips from 3 year highs (needs to break 1.3019)
NZD/USD: 130 pips from 5 year lows (needs to break 0.5193)
CAD/JPY: 110 pips from 8 year lows (needs to break 71.02)
GBP/CHF: 125 pips from 34 year lows (needs to break 1.7426)
Also on Monday, I indicated that the British pound was headed for 1.45. That target was reached this morning.
Here is the British pound chart: