Tue, 06 Dec 2022

SYDNEY, NSW, Australia - An extraordinary plunge in the British pound to an all-time low on Monday has spooked investors, sparking major falls on stock and foreign exchange markets across Asia.

In Japan, the benchmark Nikkei 225 closed down more than 700 points.

"The movements over the last couple of trading days are quite fierce," Paul Mackel, global head of FX research at HSBC in Hong Kong, told Reuters Monday. "It's a strong reminder about how suddenly the drivers for exchange rates can change."

Sterling dived by nearly 5 percent at one stage to hit a record low of 1.0327, around seven percent lower than it was 2 trading days ago.

With the euro having already cracked parity and having since traded down to 0.9600 on Monday, there are fears the pound will follow suit.

Other currencies too were sold off, with the Australian dollar buckling under 0.65 cents and the Japanese yen crumbling back below 144, a level which prompted the Bank of Japan late last week to intervene.

On Monday, Japan's Nikkei 225 lost 722.28 points or 2.66 percent to close at 26,431.55.

The Australian All Ordinaries tumbled 121.20 points or 1.79 percent to 6,667.50.

In New Zealand, the S&P NZX 50 dropped 83.50 points or 0.72 percent to 11,434.82.

South Korea's Kospi Composite plummeted 66.39 points, or 2.90 percent, to 2,223.61.

Hong Kong's Hang Seng closed down 78.13 points, or 0.44 percent, at 17,855.14.

The Shanghai Composite was off 37.14 points or 1.20 p[recent at 3,051.23.

The real action, though, was on the foreign exchange markets, where the British pound, after hitting a historic 1.0327 low, had bounced back to 1.0580 around the Sydney close Monday.

"The market is now treating the UK as if it's an emerging market," Rabobank strategist Michael Every in Singapore told Reuters Monday.

"And they're not wrong in terms of the policy response and the naivety of thinking that boosting demand rather than supply is how you deal with a supply-side shock," he said.

"If this carries across into European trading, you're going to get at a minimum a public statement from the Bank of England threatening action and...a strong possibility that they have to make an inter-meeting hike and a chunky one at that."

Monday's drama followed an announcement last week by the UK government that it would implement tax cuts and incentives to drive up business. It would appear the market believes the government did not go far enough.

"It doesn't seem like the U.K. government is throwing the market a bone here in terms of having a much more tempered fiscal trajectory, and so I think at this point right now, the path of least resistance is going to remain lower," Mazen Issa, senior forex strategist at TD Securities, told CNBC Monday.

"Below $1.05, you really look at parity," he told CNBC's "Squawk Box Asia."

"We've seen the euro dip below parity, I don't see a reason why sterling can't either," he added.

It's a "major challenge" for the Bank of England to fight inflation while the government tries to stimulate the economy, Nicholas Ferres, chief investment officer at Vantage Point Asset Management, told CNBC Monday.

While the pound was licking its losses, the euro fell to a more than 20-year low at 0.9553. Earlier in the day, it was fetching 0.9690. Around the Sydney close, the EU unit was changing hands at 0.9633.

The Japanese yen was hovering around 144.00, while the Swiss franc crumbled to 0.9877. The Canadian dollar was weaker at 1.3636. The Australian dollar dived to a low of 0.6486 and was trading at this level around the close in Sydney. The New Zealand dollar was unwanted at 0.5714.

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