Pound nosedives briefly, sending Asian markets into red

A person holding a wallet containing a five pound note in London on Oct 7, 2016.
A person holding a wallet containing a five pound note in London on Oct 7, 2016. PHOTO: AFP

The British pound nosedived in value yesterday against a range of foreign currencies, plunging briefly to an all-time low against the Singapore dollar.

Various theories were put forward to explain the pound's "flash crash''.

Analysts suggested possible rogue computer trades, an accidental "fat finger" transaction by foreign exchange dealers and fears that a difficult Brexit could see British companies losing access to the European Union's single market.

The pound's plunge also sent most Asian markets into the red, with investors on the sidelines ahead of the closely watched United States September jobs report. If job creation is robust, it may cement the case for a US interest rate hike in December.

The pound tumbled as much as 7 per cent to a record low of 1.6093 against the Singdollar yesterday morning from 1.7317 on Thursday, even worse than a 6.8 per cent plunge to 1.8567 on June 24 when Britain's referendum result to leave the EU was announced. After a bout of chaotic trading, it has since recovered to 1.69 levels.

The pound nosedived 9 per cent to as low as 1.1491 against the greenback, but quickly bounced back and was around 1.2354 yesterday.

The pound's sell-off began accelerating after Prime Minister Theresa May said on Sunday that the first formal steps to leave the EU - invoking Article 50 of the EU treaty - would take place by March 31.

But speculation was rife that the slump yesterday may have been triggered by computer-initiated sell orders exacerbated by a lack of liquidity in early trade yesterday. Others blamed human error, or a so-called "fat finger" trade.

"While Brexit fears have been reignited by PM May, yesterday's drop came as a surprise to markets," Phillip Futures strategist Bryan Lum said. "Given the absence of a significant fundamental change and the quick recovery since, the steep fall in prices was more likely due to erroneous trades."

The pound may drift to 1.67 levels against the Singdollar as investors refocus on Article 50, he added.

But not everyone buys the fat-finger theory.

Sterling's move coincided with news that French President Francois Hollande wants tough talks with Britain as it leaves the EU, to discourage anti-EU populist parties across the bloc. His strong words came as Mrs May signalled that Britain might be heading for confrontational EU talks.

Analysts warned that Singapore companies with investments in Britain may suffer currency translation losses as the book value of the investment is translated to Singdollars for reporting purposes - if they have not taken currency hedges.

City Developments (CDL), which has 22 hotels in Britain through its London-listed unit Millennium & Copthorne Hotels, said earlier that the impact of the weaker pound will be seen when the British operations are consolidated into Singdollars in CDL accounts.

But CDL remains confident in the long-term fundamentals of the British economy, Mr Grant Kelley, its chief executive, told The Straits Times yesterday.

"Globally, we manage foreign exchange exposure via a policy of matching receipts and payments, and asset purchases and borrowings in each individual country, so as to create a natural hedge."

CIMB economist Song Seng Wun said Singapore firms with operations in Britain can start planning whether to stay put or open new offices in Europe, now that Mrs May has signalled that withdrawal from the EU will start in the first quarter of next year.

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A version of this article appeared in the print edition of The Straits Times on October 08, 2016, with the headline 'Pound nosedives briefly, sending Asian markets into red'. Print Edition | Subscribe