Risk-Off: British Pound Slumps Against Euro, US Dollar, Rises Against Commodity Dollars and Rand

It looks like that for this week understanding currency movements, and importantly where exchange rates are headed, requires an understanding of risk hierarchies.

Global stock markets are selling off as investors flee assets considered to be at risk of sharp declines.

For anything that is sold, something must be bought, so we are left with a binary world of winners and losers.

Of course this view may be a little too simplistic as, in life, there are always bigger winners and bigger losers.

In the hierarchy of ‘risk’ the pound sterling sits below the yen, Swiss franc, US dollar and euro.

“Sterling fell toward a one-week low amid a broad pullback in risk appetite. The pound has become increasingly vulnerable to fluctuations in investor risk appetite,” note Commonwealth Foreign Exchange in a briefing to clients.

If we look at the currency world in this light then it helps us understand why the British pound is faring the way it is today:

The pound to euro exchange rate (GBP/EUR) is 0.83% lower at 1.2430

The pound to dollar exchange rate (GBP/USD) is 0.73% lower at 1.4160

The pound to Australian dollar exchange rate (GBP/AUD) is 0.33% higher at 1.8815

The pound to New Zealand dollar exchange rate (GBP/NZD) is 0.13% lower at 2.0850

The pound to South African rand exchange rate (GBP/ZAR) is 1.61% hightr at 21.4059

With risk aversion at elevated levels currencies that are deemed safer, i.e at the top end of the spectrum are benefiting.

Hence the pound is down against the euro, US dollar and yen while advancing against the Aussie and South African rand.  

Why are Investors Running Scared?

It would appear that the source of much of the recent of late has been the return of downside pressure in commodities, with oil prices being a particular concern.

“What little confidence that has been built up for commodities in recent weeks appears to be fading, with mining and oil producers tumbling as the value of their produce crumbles once more. While Chinese and US manufacturing is showing signs of life after FX weakness provided a welcome boost last month, it is clear that doubts remain over whether demand will provide sufficient support to commodity prices anytime soon,” says Josh Mahony at IG.

The problem is that the fear being expressed by investors is difficult to pinpoint at present with a number of reasons being given.

“Eurozone peripheral bonds are under-performing quite noticeably, suggesting that fears of a resumption of Eurozone sovereign tensions may be one reason for the abrupt shift away from risk,” says Shaun Osborne, Chief FX Strategist at Scotiabank.

Even Osborne concedes it is hard to figure out why investors are turning so shy:

“A renewed sense of concern about global growth appears to lie behind this morning’s deterioration in sentiment but the reason  for the shift is hard to pin down.”

With no one culprit to focus on we suspect markets could return to form over coming days as sentiment may easily swing back into positive territory.

When it does we could well see today’s losers become winners again.