Brexit Ripples Through European Currencies as Krone, Euro Tumble

Jane Foley: Downside Open for Pound on 'Political Chasm'
  • Pound extends decline after record one-day plunge on Friday
  • Norway’s krone weakens as oil prices hold near one-week low

The Norwegian krone tumbled, leading declines in continental European currencies including the euro, as the U.K.’s shock decision to quit the world’s-largest trading bloc roiled global markets for a second day.

The common currency was likely to weaken as people start to question investments in the eurozone, Michael Hasenstab, fund manager for the $48 billion Franklin Templeton’s Global Bond Fund, said in an e-mailed note. The krone depreciated 2.3 percent to 8.5303 per dollar, while the euro slid 0.9 percent to $1.1014 at 12:01 p.m. London time, adding to losses from Friday.

Prime Minister David Cameron resigned without spelling out when the nation intends to leave the EU, while Nicola Sturgeon, the first minister of Scotland teased the possibility of a second referendum on independence from the U.K. after a majority of Scots voted to stay in the bloc. Political turmoil continued over the weekend as a group of Labour Party leader Jeremy Corbyn’s team quit amid calls for his ouster.

“Given the political uncertainty that has emerged in the U.K. over the weekend, it’s unlikely that we’re going to have a sharp shift in sentiment over the course of the next few days,” said Simon Derrick, chief currency strategist at Bank of New York Mellon Corp. in London. “That uncertainty is going to continue to play off into a risk-off sentiment more generally.”

The bleeding in financial markets continued with higher-yielding assets bearing the brunt as investors weigh up the impact of the U.K.’s vote on the global economy. The focus is shifting to central banks as they seek to minimize the damage in trading from Asia to the U.S. The chances of a U.S. rate increase by December have already dropped to 15 percent, from 50 percent before the Brexit decision.

After the pound, the krone led declines in major currencies as crude oil held near a one-week low amid the flight from risky assets. Brent crude fell 0.6 percent to $48.11 a barrel, after tumbling 4.9 percent on Friday, as most commodities dropped on the U.K. vote. Sterling plunged 3.5 percent to $1.3207.

“It’s no surprise to see Norway’s krone weaker given the hit to oil prices and heightened global growth worries from the Brexit decision,” Ray Attrill, Sydney-based global co-head of foreign exchange strategy at National Australia Bank said. “Unless we see the dollar give ground or oil prices quickly recover, the currency is likely to remain a G-10 underperformer for the time being,” he said referring to the basket of 10 developed market currencies.

Losses Across Europe

Among currencies active against the U.S. dollar on Monday, declines of at least 0.8 percent were seen in Sweden’s krona, the Danish krone and both the Australian and New Zealand dollars.

The British referendum results surprised many investors who had bought higher-risk assets in the lead-up to the referendum amid optimism the “Remain” camp would prevail. Governor Mark Carney said the Bank of England could pump billions of pounds into the financial system, while the European Central Bank said it will give lenders all the funding they require to counter market turmoil.

The Federal Reserve said it was “carefully monitoring” financial markets. Bank of Japan Deputy Governor Hiroshi Nakaso said the central bank will work with counterparts to ensure foreign-exchange liquidity.

The pound will continue to come under pressure and should fall to the $1.20-to-$1.25 range by the end of the third quarter, said Sue Trinh, Royal Bank of Canada’s Hong Kong-based head of Asian foreign-exchange strategy.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE