Sterling breaches 90p barrier against euro after ‘flash crash’

Pressure on Irish exporters while British business leaders plead with PM over Brexit and Chancellor tries to restore calm

Sterling has breached the 90p barrier against the euro, in a move likely to increase pressure on Irish exporters and generate fresh concerns within the Government.

The shift came after an overnight “flash crash”, which sent sterling plunging in value by more than 6 per cent against the dollar. The Bank of England said it was “looking into” the drop.

The UK chancellor Philip Hamond tried to restore calm to currency trading in sterling on Friday afternoon, saying the government had not decided to pursue a “hard Brexit” and that the pound’s flash crash was the sort of “turbulence” he expected for the next five years.

Business leaders

It comes as British business leaders are to warn Theresa May against pursuing her current tilt towards a "hard Brexit".

In a letter to Mrs May drafted by the CBI employers group, the executives plead with the prime minister to take companies’ views more into account, amid fears that she is sidelining business as she plots her Brexit strategy.

“The government must set out a clear road map for consulting with firms of all sectors and sizes to increase confidence that these complex decisions are taken on the basis of fact and a genuine understanding of the economic implications,” the letter said.

Relations between the government and business reached a nadir following a series of speeches at the Conservative party conference this week that were strongly critical of UK business, including one by Mrs May herself.

The value of sterling dived during Friday’s Asian trading session to $1.18, hitting fresh 31-year lows before recovering to $1.238.

Sterling hit the low in two minutes of chaotic trading in Asia, with traders saying the slump was exacerbated by computer-initiated sell orders.

The 6.1 per cent slide, the biggest decline since the UK’s Brexit referendum result, drove sterling as low as $1.1841, its weakest level since March 1985.

At least one electronic trading platform recorded a transaction as low as $1.1378, said traders.

Against the euro, sterling was quoted well over 90p during the “flash crash”, but then moved back below that level, before breaching it again later on Friday morning. It has been fluctuating around 90p since.

Pound ‘bloodied and bruised’

The crash has capped a torrid week for the pound on the currency markets, with sterling dropping more than 4 per cent against the dollar since September 30th.

The UK currency plumbed new depths on Thursday after German chancellor Angela Merkel took a tough stance on Brexit, saying Britain would not get access to the European single market if it did not accept free movement of people.

Connor Campbell, financial analyst at Spreadex, said: “If the pound was a prize fighter, the referee would have already rung the bell, the currency bloodied and bruised beyond belief.”

He said that it now seemed that the pound was recreating Thursday night’s “flash crash” in slow motion, as it remained heavily down against the euro and the dollar.

Any hopes that an economic update from the manufacturing sector would provide some relief for the UK currency were quickly dashed.

Output could only muster a slight rebound to 0.2 per cent in August, while industrial production posted a worse-than-expected fall of 0.4 per cent over the period.

In contrast, sterling’s slide has dished out a hefty boost to the FTSE 100 Index in recent sessions, with the London marker coming within a whisker of recording an all-time high on Tuesday.

Foreign companies listed in London have seen their shares rocket amid the pound’s tumble as it boosts their earnings when they are translated back into sterling.

Intensify pressure

The sharp fall of sterling will intensify pressure on Irish exporters and increase calls for the Government to support them in the budget.

The extent and speed of the drop adds to signs that bouts of extreme volatility are becoming more common in the global currency market as the volume of transactions dwindle and algorithmic traders pick up market share.

“In a word, frightening,” said Karl Schamotta, director of foreign-exchange research and strategy at Cambridge Global Payments in Toronto. “Confidence in the currency markets has been badly shaken once again, and any trader who rode tonight’s rollercoaster will certainly question the quality of liquidity going forward.”

The pound pared the drop to trade 1.5 per cent weaker at $1.2427 later in Tokyo. Traders speculated that the initial decline may have been sparked by human error, or a so-called "fat finger", with algorithms adding to selling pressure at a time of day when liquidity is typically low.

Others pointed to a Financial Times article citing French president François Hollande as saying the UK must suffer the consequences of leaving the European Union.

"It would seem that it caught the market wrong-footed and triggered a lot of algorithmic selling," said Hugh Killen, Westpac Banking Corp's head of trading for foreign exchange, fixed income and commodities, in Sydney. "We didn't see any significant demand for sterling off the low. It was more of the point that the selling subsided and the market calmed and it reverted back to a level that was more realistic for the day."

Hard Brexit

Leaving the EU has been the main topic at the Conservative Party’s annual conference this week, where UK prime minister Theresa May seemingly moved closer towards a so-called hard Brexit that would restrict access to the EU’s single market so that the government can control immigration.

Sterling has tumbled since Ms May’s speech on Sunday, accelerating losses as she was said to take the view that financial services would get no special favours in EU exit talks.

Derek Mumford, a director at Rochford Capital Pty in Sydney, said he and his colleagues were searching for a reason as the pound tumbled Friday, scanning news agency reports and the internet.

“The speed of the move looks like a kind of a flash crash; some sort of failure,” Mumford said, adding that sterling is set to drop to $1.15 in the coming weeks if it doesn’t recover above $1.28. “I’m sort of struggling to justify it. I don’t think there’s any shock that the EU will be going for a hard Brexit.”

With March now set as the deadline for triggering divorce proceedings, tensions are playing out in the currency market. The pound has dropped 16 per cent since the referendum to leave the world’s biggest single market, and is 2016’s worst performer among 31 major currencies tracked by Bloomberg.

Companies including Goldman Sachs Group and AllianceBernstein Holding have issued predictions for more pain ahead.

“It looks like it was an algorithm-driven flash crash triggered by a Financial Times article based on French president Hollande’s speech on Brexit,” said Angus Nicholson, a markets analyst in Melbourne at IG Ltd.

“Given low volumes in the Asian session, it would have forced other algorithms to join in and magnify the fall.”

– (Financial Times/Bloomberg/PA)

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