'Currency market tsunami' is not yet over

Last week saw Sterling fall against the Dollar by 22 cents - the equivalent to a whole year's average volatility in one week.

This morning saw the volatility continue with no sign yet that Sterling's pounding is over.

Bob Munro, Senior currency strategist at HiFX described last week's moves as a 'currency market tsunami', the full effects of which will not be evident until ‘after the waters have receded'. What is clear at the moment is that the GBP/USD rate is falling due to overwhelming Dollar strength rather than exclusive Sterling weakness.

Munro explains: "The huge falls in stock markets and commodity prices around the world are testimony to the panic selling of assets by Hedge Funds, Insurance, Pension and US Mutual Funds around the globe as investors seek to redeem their investments before they lose further value. Hedge Funds in particular, having leveraged up their investments, are having their lines of credit withdrawn by the banks and finding that their forced sales into illiquid overseas markets are driving prices lower at an alarming rate".

"It's estimated that up to 75% of Hedge Funds are Dollar based, either directly or due to their base currency being linked to the Greenback. This includes funds originating from China and the Gulf oil states. Thus when non-Dollar assets are sold, the Dollars must be re-purchased, leading to the current enormous demand. The crumbling of asset prices and currencies in countries such as Brazil, South Korea, Hungary, Poland and South Africa illustrate the panic nature of the Hedge Fund's exit".

Munro concludes, "With no floor yet in evidence in either stocks or commodities and the assets and currencies of emerging nations continuing to crash (Hungary and Ukraine being the latest in joining Iceland by seeking funds from the IMF to bail out their beleaguered economies), we must conclude there is a strong possibility that both the volatility and the Dollar strength will continue. Allowing for the fact that the lack of liquidity is exaggerating every move in the currency markets, we might expect a 1.40-1.70 range in coming weeks (or even days!), before there is any chance of the dust settling and global risk appetite returning.

"What is left when this currency market tsunami finally recedes will have to be assessed at the time."