Foreign Exchange Report : Stock Market Collapse Gathers Pace, Taking the AUD, NZD and ZAR With It

August 9, 2011 - Written by John Cameron

STORY LINK Foreign Exchange Report : Stock Market Collapse Gathers Pace, Taking the AUD, NZD and ZAR With It

The Pound Euro exchange rate (GBP EUR) is 1.1498. The Pound Dollar exchange rate (GBP USD) is 1.6341. The Pound Australian Dollar exchange rate (GBP AUD) is 1.6089.

The sell-off in global stocks has continued at pace over the last 24 hours, with New York’s Dow Jones recording its sixth worst day in history yesterday, closing down by over 5.5%, while the benchmark S&P 500 index ended the day down by 6.66%. Incredibly, all 500 of the stocks listed on the S&P 500 finished the day lower.

The shift out of riskier asset classes and into bonds and gold continued during last night’s Asian session, with Hong Kong’s Hang Seng index trading down by over 6% at one stage before recovering slightly later in the session. The downward move in Asian stocks was exacerbated by Chinese Consumer Price Index data released overnight, which showed that Chinese retail prices are increasing at a faster pace, raising fears that the Chinese authorities may take further steps to tighten domestic monetary policy, dampening growth across Asia.

The global equities sell-off which has taken place over the past two weeks, causing the benchmark S&P 500 to lose almost 17% of its total value, has been triggered by a series of events - a run of poor global data releases pointing to a potential slow-down in economic activity, fears that the Eurozone and US debt crises may be set to impact on the global recovery and leading credit rating agency S&P’s downgrading of the US’s debt rating from AAA to AA+.

The danger now is that the sharp downward movement in shares will gain its own momentum, causing a full-scale stock market collapse. The closely-watched $VIX index, which measures the number of protective ‘put’ orders investors are using when executing equities trades, rose by a massive 50% during yesterday’s North American session, taking it to its highest level since the start of 2009. The $VIX is sometimes referred to a the ‘panic gauge’ and is used to measure levels of fear in the market.

An escalation of risk aversion would be supportive for the GBP AUD rate, which broke to 1.6390 overnight, just a cent short of its highest level since last October. The GBP NZD and GBP NZD rates would also be likely to move forward, while the Swiss Franc is likely to be the major beneficiary if the current economic storm continues.

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