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The Pound to Dollar exchange rate rallied sharply on Thursday but GBP/EUR fell heavily as the Euro soared amid a continued unravelling of US equity markets, which might reflect a re-evaluation among investors of the stratospheric, and perhaps now indefensible, valuations that have long prevailed across the pond.
GBP/USD rallied more than 1% to recover the 1.29 handle as the US Dollar came under pressure against all advanced economy currencies except for the Norwegian Krone, although the pair was respectful of GBP/CNY and its close proximity to the upper limit of Beijing’s Thursday trading band for the Renminbi.
The upper limit of the band was set at 9.4989 and when considered in conjunction with the equivalent topside limit for USD/CNY and the price action in the latter pair, it gave rise to implied and de facto limits for GBP/USD, which began at 1.2939 and rose to 1.2988 with the decline of USD/CNY into the Asia close.
“The USD can’t rally on a 12% jump in the NASDAQ. I think we are entering a pure sell USD regime where we will see a high-Sharpe rip to 1.1500 in EURUSD,” says Brent Donnelly, CEO at Spectra Markets and a veteran FX trader.
“Buy EURUSD at 1.1051 with a stop at 1.0874,” he adds.
Above: Pound to Dollar rate shown at hourly intervals with GBP/CNY. Click for closer inspection.
Meanwhile, the Pound to Euro rate fell from the opening bell in London as the single currency soared amid a deepening rout in US Dollar rates that has seen currencies of current account surplus jurisdictions like the Euro Area, Switzerland and Japan surge by 2% or more against the greenback each day this week.
This unravelling of the Dollar is taking place alongside a spiral in US equity markets and in an apparent response to White House trade policy, which aims to reshore production of domestically-consumed goods and so can be expected to erode the profits and margins of corporate America in the short-to-medium term.
That renders indefensible the stratospheric, if not outrageous valuations that have prevailed across the pond since at least the beginning of the first administration helmed by Donald Trump, if not even longer.
The equity rout is acting as rocket fuel for the Euro, Swiss Franc and Japanese Yen, which is in turn exacerbating the ongoing declines in both the trade-weighted US Dollar and trade-weighted Chinese Renminbi, which fell far below Beijing’s floor for the currency in CHF/CNY, JPY/CNY and EUR/CNY on Thursday.
Above: Pound to Euro rate shown at daily intervals with EUR/USD. Click for closer inspection.
“This is a flow driven move as assets continue to rotate out of the US and into places like Europe and Japan and elsewhere. Investor confidence in US markets is rattled and not likely to be repaired anytime soon,” says Brad Bechtel, global head of FX, at Jefferies, in Thursday market commentary.
It’s possible that these moves, and interventions from the People’s Bank of China, were what helped pull USD/CNY lower into the Asia close on Thursday despite President Donald Trump raising the US tariff on imports from China to 145% previously on Wednesday, in what has quickly become a tit-for-tat trade spat.
The simultaneous sell-offs in US Dollar pairs and US equity markets are mutually reinforcing and, together, they become self-perpetuating because as a rule of thumb, international equity investors rarely maintain anything more than partial hedges of their foreign exchange exposure.
This means that when the Dollar declines, the value of US stock investments also declines, which then magnifies the overall portfolio losses when markets fall and becomes a reason for some investors to sell stocks if the Dollar declines, and vice versa.
However, there may also be mutual reinforcement between the declines of the trade-weighted Dollar and trade-weighted Renminbi because Beijing’s basket-based approach to its managed-float creates a correlation or quasi peg between the two. This is why the RMB/CFETS index and Federal Reserve’s Broad US Dollar Index tend to shadow each other.
Above: EUR/USD shown at daily intervals, with USD/JPY, USD/CHF. Click for closer inspection.
An original version of this article can be viewed at Pound Sterling Live