A Currency Crisis Called Brexit

By Shivaji Ghata

A Black Friday

Call it a black Friday or what you will, the events that unfolded on the 24th of June 2016 would remain an enigma in the minds of the millions who voted and those across the Globe who watched in awe as history was rewritten 43 years after Britain was officially signed in as a part of the Eurozone. Almost immediately after the landmark outcome of the referendum came to light, markets around the globe reacted wildly even as the Pound Sterling suffered its biggest single day fall ever. While investors rushed to find solace in Bonds and Gold, the strength of the Japanese Yen forced investors out of equity markets across the Eurozone and beyond.

The Pandora's Box

Central banks round the world had been at the receiving end of a full-blown Currency War post the Lehman Brother saga when the Federal Reserve was forced to intervene with its one of a kind Quantitative Easing measure that would have far-reaching consequences across the global financial arena. Even as I write this column, the Pound which is trading at 1.3310 has fallen 17% since it made a high of 1.5930 in the year 2015. The fall in the currency has sent shock waves across European and Japanese markets forcing investors to pile up safe heaven assets causing the Yen to strengthen below 100 per dollar.

The Pounding of the Pound

The onus now lies on Policy makers and Centrals Bankers to respond and contain the spillover of the Brexit fallout. Markets around the world are craving for liquidity even as top banks in the United Kingdom face the heat of the falling Pound. While Global Markets reeled under the pressure of liquidity crunch, erratic moves in indices grabbed the attention of central bankers, so much so that Bank Of England's Mark Carney took preemptive measures to announced the availability of 250 billion Pounds to banks across the United Kingdom. Such unforeseen levels of Currency Crisis would result in possible interventions by the likes of BOJ and PBOC in the days ahead.

What Lies Ahead

While high volatility has been a cause of ruin for short-term traders, it would certainly act in favour of those who loathe for Rate Cuts in the coming months. The Federal Reserve has clearly stated its stand on Global Uncertainties and has promised to cooperate with central banks around the world by staying away from further rate hikes in 2016 and possibly in 2017. There is room left for the ECB to make arrangements for further easing to pacify jittery nerves in the face of the ongoing crisis.

Central banks round the world had been at the receiving end of a full blown Currency War post the Lehman Brother saga when the Federal Reserve was forced to intervene with its one of a kind Quantitative Easing measure that would have far reaching consequences across the global financial arena...

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