Stock Markets Crumble: Which Currencies are Winning and Losing?

Investors are selling shares with gusto once more, a scenario that does not support the UK currency, but produces winners elsewhere. This is what you should be watching today.

The pound has dropped notably on the opening bell on Thursday, tracking the FTSE 100 lower.

The FTSE 100 is an eye-watering 2.33 pct in the red, the GBP to EUR exchange rate is nearly a percent lower at 1.2748.

However, "the main pain is being felt on the continent, with Credit Suisse hitting a 25 year low and Societe Generale (which warned it may miss its profit targets for 2016 due to the dual pressures of tighter regulation and the current market conditions) dropping a whopping 12%. They weren’t alone; arguably the stock that kicked off the week’s woeful trading, Deutsche Bank has lost a huge chunk of yesterday’s market-lifting rebound with a 7% plunge this morning," notes Connor Campbell at Spreadex.

The volatility in sterling markets is elevated, and once we publish one article we find ourselves having to scratch it as the currency turns in the other direction!

So, let’s take a look back and appreciate the bigger picture. Sterling is under pressure for a number of fundamental reasons which include the UK vote on EU membership due in 2016.

Also weighing are slowing growth in the UK as well as Bank of England reluctant to raise interest rates for at least a year.

Then there are global currency flows - as markets sell off a number of currencies gain. Funding currencies such as the yen and euro benefit as investors repatriate funds they borrowed at incredibly low interest rates.

Those borrowed funds were used to finance stock market punts, and when those punts are shut down the borrowed money flows back to its origin, boosting demand for the euro.

It is with that in mind that we witness further euro gains as late night market selling in the US spread to Asia this Thursday.

“The EUR remains a main beneficiary, rightly or wrongly, of the 'risk-off' phase we have been in, while the pound and the UK remains worried around EU referendum issues and not benefitting from its previously held safe haven status,” says Robin Wilkin at Lloyds Bank.

As such the euro is forecast to extend recent gains against sterling.

The EUR/GBP cross is still in a bull phase from the December lows around 0.70, “with the break-up through last year’s range highs in the 0.7450-0.75 region opening this extension, with little in the way of meaningful resistance till the 0.80/0.82 region,” note Lloyds.

Minor resistance lies on the day at 0.7875.

The dollar is meanwhile expected to push higher against sterling once more. While the US dollar has been an under-performer of late there is little to get excited about when it comes to sterling.

“We have shifted back towards the top of the interim range between 1.4375/50 and 1.4600/1.4650. While under this resistance we have a bias to look for a move back towards the 1.4200 region of congestion and ultimately back to the 1.40- 1.35 key long-term support zone,” says Wilkin.

Market Sentiment Key

FX markets are likely to take their cue today from the equity markets again. A decline in stocks will likely see further “safe-haven” currency buying, benefitting the JPY, CHF and EUR, which have been this week’s outperformers.

“With Brent Crude once again threatening the $30 per barrel mark the FTSE immediately fell over 2% this morning, sending it below 5600 in the process. The commodity sector, as it has been for such a long time now, was the main drag this Thursday, with Rio Tinto leading the losses,” says Connor Campbell at Spreadex.

Looking at European markets, the DAX and CAC dropping 2.5% and 3% respectively, the former hurt by Deutsche Bank’s 5% fall with the latter dropping below 4000 as the day got underway.

Yesterday investors rushed into US treasuries and sent sovereign rates lower, especially on the short end of the yield curve.

The 30-year yield settled down 10bps to 2.49%, while the 10-year yield also fell 10bps to 1.67%, suggesting that investors are becoming more pessimistic about the long-term outlook.

“The US dollar printed a fresh 16-month low against the Japanese yen, suggesting that traders believe the BoJ will be unable to further weaken the yen, while betting the Fed will remain sidelined for a longer period of time,” says Yann Quelenn at Swissquote Bank.