Pound in Freefall

The over -6.00% plunge in the Pound during the Asian overnight session marked the biggest move since the UK’s “Brexit” referendum, driving Sterling to as low as $1.1840 to the lowest level seen in the GBPUSD pair since March of 1985. The ferocity of today’s decline is further evidence of the extreme volatility that is becoming commonplace in the global foreign exchange market as algorithmic traders keep increasing their transaction volumes. Some analysts reckon that French President Francois Hollande’s comments on Thursday, urging EU members to lead tough negotiations with the UK to avoid contagion, might have also helped bearish sentiment to peak.  Going forward, the outlook is not bright for the currency as speculation of further rate cuts by the Bank of England gather momentum amid the backdrop of a possible December rate hike from the US Federal Reserve.

Chinese foreign exchange reserves fell by a greater than expected pace in September, data from the People's Bank of China showed today, adding further credence to reports that the country’s Central Bank has stepped up efforts to defend the Yuan. Reserves last month fell by $18.79 billion compared to August’s decline of $15.89 billion. Economists polled by the Wall Street Journal had projected an $11.00 billion drop in September. The latest decrease was the largest monthly fall since May.  In an effort to continue easing policy to help the economy meet its growth targets, maintaining the Yuan peg to the dollar has grown increasingly expensive as evidenced by the outflow from reserves.  At a certain point, the Central Bank may be forced to give up on its efforts, as the strategy becomes too costly considering the necessity of reserves for financing trade.