British pound steadies near 31-yr lows

Sterling has halted its fall, bringing a measure of breathing space for the currency.

The British pound stabilised in Asian trading on Tuesday, bringing a reprieve for the battered currency after recent sharp declines in the wake of the UK’s vote to leave the European Union last week.

Other major currencies were also steady, while China’s central bank again allowed the yuan to weaken against the US dollar.

The UK currency was up 0.9 per cent at $US1.3335 from the New York close, after a wrenching few days of trading that resulted in a 11.5 per cent plunge in the value of sterling. Standard & Poor’s and Fitch Ratings each downgraded their credit ratings for the UK on Monday.

Despite Tuesday’s modest rally, the pound remains near 1985 lows.

The euro also advanced 0.5 per cent to $US1.1073, though it is still down 3.5 per cent since the UK voted to leave the EU.

Investor confidence was returning in Asia after markets plunged on Friday in response to a referendum outcome few had anticipated, said Amy Yuan Zhuang, chief analyst at Nordea Markets in Singapore.

“After the panic and the initial reaction, the market has realised that the implications maybe aren’t as bad as we feared initially,” she said. “Our view isn’t that things will get worse from here -- in terms of market reaction, I think we’ve already seen the worst.”

The US dollar index, which tracks the dollar’s strength against a basket of six currencies, fell 0.6 per cent to 95.983 as markets priced in an increasing likelihood the Federal Reserve will keep interest rates on hold for the foreseeable future. Federal fund futures also showed markets were pricing in a 17 per cent probability the Fed will cut rather than raise rates by its November meeting.

“Effectively, the market is no longer looking for a Fed hike this year,” analysts from DBS wrote in a research report.

Asian currencies remained choppy in early trading, with the Japanese yen fluctuating between gains and losses, recently 0.2 per cent weaker at 102.17 against the US dollar.

The Chinese yuan was stable after the People’s Bank of China weakened its daily fixing rate by 0.2 per cent to 6.6528 against the US dollar, the weakest level since 2010, taking the total depreciation of the so-called “fix” in the past three days to 1.3 per cent after a larger move Monday.

Onshore, where it is allowed to move 2 per cent above or below the daily reference rate, the Chinese yuan held steady at 6.6494. In Hong Kong, where the currency trades freely around the clock, the offshore yuan was unchanged at 6.6791.

The yuan’s fixing was weaker than most traders’ estimates, suggesting that the PBOC was mainly using the dollar’s recent strength to dictate the yuan’s direction, traders said.

“The feeling is that the fixings in recent days have been more of a reflection of the dollar’s rally, instead of other currencies,” said a Shanghai-based senior trader at a domestic bank. “The PBOC is telling people that, look, we are following the dollar more closely now, so the outlook for the currency is quite clear.”

He said the relative clarity of the PBOC’s current strategy could quell anxiety about its currency, which in turn could stem capital outflows from China.

“That’s why people are actually quite calm this time and the central bank isn’t intervening in the market that often or aggressively,” he said.

- With Shen Hong

Wall Street Journal