Foreign Exchange Report : Global Share Markets Collapse as Panic Grips the Markets, Sending GBP AUD Rate Spiralling

5 Aug 2011 at 7 AM - Written by John Cameron

STORY LINK Foreign Exchange Report : Global Share Markets Collapse as Panic Grips the Markets, Sending GBP AUD Rate Spiralling

The Pound Euro exchange rate (GBP EUR) is 1.1541. The Pound Dollar exchange rate (GBP USD) is 1.6254. The Pound Australian Dollar exchange rate (GBP AUD) is 1.5570.

All-out panic has taken a hold of investors over the last twenty four hours, with market participants fearing the worst about the Eurozone debt situation and the prospects for the continuance of the global economic recovery.

Concerns regarding the Eurozone’s debt situation were stoked by comments made by European Commission President Jose Manuel Barroso in a letter to European governments, released yesterday morning. In his letter, Barroso warned European leaders that the Eurozone’s debt crisis was in danger of spreading across the world’s economy; he went on to call for the scope and powers of the European Financial Stability Fund to be increased in order to avoid debt contagion within the Eurozone and expressed his ‘deep concern’ at the spreads that Italy and Spain were paying on their bonds.

European Central Bank President Jean-Claude Trichet added to the sense of doom when he spoke at his monthly press conference, following the ECB’s rate decision yesterday afternoon. Trichet observed that global economic uncertainty was ‘particularly high’ at the moment and stated that downside risks to the Eurozone’s continued economic growth have ‘intensified’ over the last month. Trichet pointedly refused to confirm or deny market rumours that the ECB had been intervening in bond markets in order to support debt-addled Italy and Portugal.

As investors’ concerns that the Eurozone’s debt crisis might be set to worsen and spread, the Chicago Board Options Exchange Volatility index, or VIX, rose by over 30% on the day to close at it’s highest level for over 13 months. The VIX index measures the number of protective positions that traders are using for share deals and is viewed by analysts as a ‘fear gauge’.

The acute levels of risk aversion in the markets saw London’s FTSE 100 close down by almost 3.5% yesterday, while the benchmark S&P 500 index in the US lost almost 5% of its value during the session. The S&P has now dropped by nearly 11% since the middle of last week.

This extreme downward movement in global risk appetite has seen support for the high-yielding currencies dissipate, sending the GBP AUD rate to 1.5577 overnight, it’s highest level since mid-April. The GBP NZD and GBP ZAR rates have similarly surged. With Asian equities suffering heavy losses during last night’s session, further upside is possible for these pairs later today, particularly if this afternoon’s US Non-Farm Payroll figure for July once again disappoints.


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