A future unknown: GBP/USD post-Brexit
The GBP/USD currency pair started the year trading around 1.473 and as recently as last Thursday (23 June) was as high as 1.500. Since then we’ve seen the pair give up over 11% and it is currently (1 July, 3.30pm) trading around 1.330. The precipitous decline of the pound against the dollar has been spurred, of course, by the shock outcome of the UK’s EU referendum.
The sharp depreciation of the British pound is likely to continue in the aftermath of the vote given the massive uncertainty that has gripped financial markets. The full implications of the decision to break from the EU are unknown, and tremendous anxiety abounds both in equity and currency markets and within political circles.
FXB ETF plunges and UK gets credit downgrade
Naturally, the decision to break from the EU plunged the CurrencyShares British Pound Sterling Trust (FXB) into a tailspin. On the day following the vote, the FXB dropped 8.4% with overall activity 29 times greater than the daily average. While many currency traders feel that the correction in the pound’s trading range has already been factored in, others feel the worst is yet to come. This is bound to impact on the FXB as well.
In fact, the situation in the UK is spiralling into dangerous territory after the recent credit downgrade by S&P from AAA to AA. The announcement on Monday did not come entirely as a surprise given S&P’s advance warning about the implications of a Brexit. S&P’s reasoning was that ‘In our opinion, this outcome is a seminal event, and will lead to less predictable, stable and effective policy framework in the UK.’
Other issues now driving speculative behaviour with spread betting companies include the renewed question of Scottish independence from the UK. Recall that the Scots held a 2014 referendum on independence which resulted in a narrow win for the ‘Better Together’ campaign. As Scottish voters last week opted overwhelmingly to remain in the EU, at odds with the count across the UK as a whole, the vote has led to calls for a second referendum on independence.
Equities in turmoil post-Brexit
Traders, investors and speculators across the board adopted a risk-off approach to global stocks in the wake of the referendum, which manifested in sharp declines on Friday 24 and Monday 27 June.
The worldwide sell-off in equities resulted in over $2.08 trillion worth of value being wiped off the markets in a single day. European forces were hardest hit with the Ibex 35 plunging over 12% and the Euro Stoxx 50 plunging over 8% on the day. Surprisingly, the FTSE 100 was the best-performing European index, despite plunging over 3% after the votes were counted.
On Monday 27 July stock markets continued their poor run of form – as expected – with sharp declines in Europe and Asia. By the end of the day, the Euro Stoxx 50 PR plunged an additional 2.83% to close at 2697.44, the FTSE 100 slipped 2.55% lower under the critical 6000 level to close the day at 5982.20, the German DAX 30 closed 3.02% lower at 9268.66 and the French CAC 40 closed 2.97% lower at 3984.72. The Ibex 35 in Spain dropped another 1.83% to close at 7645.50, marking a one-month decline of 16.05% and a one-year decline of 32.77%.
In the US, all major indices including the Dow Jones, the S&P 500, the Nasdaq Composite and the NYSE Composite ended in the red for the second day in a row.
It is worth noting, however, that the FTSE 100 has since regained its pre-vote level and is now through 6500. Other European indices have similarly made gains but not to the same degree.
Ironically, the man who ‘broke’ the Bank of England, George Soros, failed to bet against the pound as he was hoping that the Remain campaign would win out in the end. Just days before the vote was tallied, Soros cautioned that the pound could drop as much as 20%, and already it is 11% down and spiralling fast. Soros was cautious, however, by betting against equities after the Brexit vote was tallied. While he didn’t make money by going long on the pound, he generated substantial profits by betting against equities worldwide.
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