Hopefully not too many Irish exporters were sitting up checking the foreign exchange markets in the early hours of Friday. Shortly after midnight, after the US markets had closed, the British currency suddenly collapsed 6 per cent against the US dollar, its biggest fall since the referendum vote. This would have send it well over 90p against the euro, with some quotes putting it over 94p for a brief period.
Things had settled a bit by Friday morning, though shortly after European markets opened it still took over 89p sterling to buy a euro. By mid-afternoon the rate was up not far 90p, having earlier broken through this level.
There is no one exchange rate figure which puts Irish exporters in trouble, but we are already in the territory which is creating severe difficulties.
An Irish Exporters Association survey says 20-25 per cent of exporters start facing serious difficulties at 85p, and another 20- 25 per cent at 90p. Ibec has renewed its warning about thousands of jobs at risk.
So what on earth happened in Asian markets?
All we know is that sterling collapsed suddenly, some time just after midnight Irish time, and in the subsequent half hour clawed back a lot of the losses.
Significant swings
A 6 per cent drop in such as space of time is huge, but the amount of currency being traded at that hour is limited, and limited liquidity can mean more significant swings.
Among the possible explanations is a so-called “ fat finger” – a trader pressing the wrong button on a significant order. Yet the foreign exchange market is a collection of thousands of traders and markets across the world and so, unlike, say, a big stock exchange, there is no single source of information.
Much trading is now driven by automatic computer actions “decided” by algorithm, and so it is possible that an initial fall was accelerated as these kicked in, or that there was an error built into one. Nervous investors often leave orders for brokers to sell if a currency hits a certain level to safeguard them against bigger losses. This may also have been a factor.
Either way, an analysis by the Financial Times shows that sterling fell from $1.26 to $1.18 in two minutes, reaching its lowest level since March 1985. Bloomberg reports some quotes may even have gone as low as $1.14.
Key trades
According to the
FT
, the key trades happened just seconds before news broke of a hard line being taken by French president François Hollande on
Brexit
. Did someone see an early tweet or comment and panic?
If Britain wants “hard Brexit” they can have it, was the gist of what Hollande said. “There has to be a price to pay or else the negotiations won’t go well.”
While uncertainty continues about the precise cause of the overnight collapse, the direction of sterling is depressingly clear. Unsettled by Theresa May's apparent prioritisation of immigration control over trade considerations – and tough signs from Germany and France – investors are selling. Sterling has fallen not far off 5 per cent over the past week.
Currency forecasting is a notoriously risky business, but there may well be more of this to come, and already it carries big risks for Irish growth and jobs.
