Capitalmind
Capitalmind
Actionable insights on equities, fixed-income, macros and personal finance Start 14-Days Free Trial
Actionable investing insights Get Free Trial
Charts & Analysis

Currency Madness: Brexit Causes Pound to Plunge, Yen To Rise to 100

GBP-Long-Term.png

You wouldn’t think that Britain moving out of the EU would be this damaging, especially after markets remained a little happy yesterday when they all went 1% up happy that the betting sites had it right that Britain would remain in the EU. Well, they didn’t, it seems, because the referendum results, at about the halfway stage, show otherwise. Brexit Vote

And that’s spooked the British Pound

Which is down, well, a lot.

GBP Short Term

This is a massive fall for a currency that hasn’t seen this level for a really long time. A really really long time. Not for the last 10 years!

GBP Long Term

The ten-year low, and getting lower, is brilliant for British exporters. Not so much for people in Britain who have loans denominated in USD – they just have to return 10% more in pounds!

Oh, And The Japanese Yen is Rising Dramatically Too – 100 Breaches

JPY Goes to 100

The big exporter in the top economies, Japan is seeing a major rise as the carry trade unwinds. People are returning to the Yen.

Other things:

  • The US S&P futures are down 3.5% at this point
  • Nikkei is down 3% too
  • The USD Index is up 3% at 96

Should You Panic?

If you’re a British Importer, maybe. But the market reaction in the short term is not the same thing as how things work in the longer term. In the short term, a Brexit may not even happen (votes are not yet counted fully). If it does happen, the reaction on the pound could mean a run to safety (Dollar/Yen) which means an exit from the Rupee. 

A rupee drop – to say 68 or so – will change a lot of fundamentals for India which has a bunch of loans to return later this year. There’s also the fact that Indian corporate ECB will hurt big time, since most of such loans are unhedged. Companies like Tata Steel, Tata Motors, Tech Mahindra etc. who have big exposures to the UK will have a tough time in dollar or rupee denominated revenues. 

The Yen hurts Maruti who has some 20% of revenues paid out to Suzuki in Yen royalties. There are others who’ve borrowed in the Yen, who hurt too.

There’s a countless other downstream impacts too. Let’s react, not predict though – there will be reactions and overreactions – if you can’t sleep, sell until you can. 

  • Ittiam says:

    Unexpected buying opportunity. 🙂
    Have put in my buys. Hopefully will get NAV cutoff of today itself

  • Andrew L D Cunha says:

    Good analysis except last line. Why to sell if we can’t sleep. Selling will not guarantee sleep. Do you mean in such situations, when investor looses sleep he should sell his holdings? This sentence from highly respected capital mind not expected

    • Of course. You should never lose sleep. THerefore if stocks are causing you to lose sleep, you should sell until you get sleep.

      • Andrew L D Cunha says:

        I don’t think so. Loosing sleep due to more than expected reaction (stock market) is naturall. Not only in finance but also in profession. Lawyers, engineers, doctors, Fin advisors, businessmen loose sleep and even politicians. Selling or running away is not a solution Sir. Anyway, thanks

        • Long term non-active investors that lose sleep over their positions are either overleveraged or stupid. People doing this as a job have their pressures, like lawyers or whatever, and that’s also a place where losing sleep is not desirable. So if you do investing as a job, then you might lose your sleep on what you will tell your customers etc.
          But as a passive investor, you should have no reason to lose sleep over your positions. Selling is not running away – that’s just a hilarious way to look at markets. Getting wedded to stocks is just silly – they don’t love you back, and no one will care if you held a stock through a tough time and lost money. I would always say invest without losing sleep, and if you’re losing sleep, sell until your anxiety is gone.

  • Andrew L D Cunha says:

    I agree with you. We should invest without loosing sleep. We should enjoy our investment. However, I still feel, loosing sleep during extreme market reactions or any other calamities which are not in control of investor or person is natural and it happens once in a year. Naturally panic will enter even to a passive investor. According to me panic is natural and losing sleep for sometime (may be once or twice a year) is also natural. How we react, how we behave, what action we take during this panic situation. According to me selling is one of the reaction investor take during panic. What I personally feel investors even they loose sleep for a day should not sell in panic. They may loose sleep again regretting their decision of selling too. While investors enjoy their journey of investment, anxiety once in a year is natural. I am sure you will agree a event should not influence our sell or buy decision. Reading your blog and analysis is great experience and it helps to evaluate financial world. Thank you.

    • Thanks mate 🙂 The idea is to be comfortable with your risk. If panic causes you to lose sleep, you are overleveraged 🙂 People feel weird about falls but if your position is comfortable you won’t lose sleep. I know investors who have 70% of their net worth in equity and even a 40% fall does not make them lose sleep. There are others who lose sleep over even a 100K portfolio when their net worth is 75 lakhs. So for the latter, I always tell them to sell only – it’s just better for health, maybe their portfolio should be 50K, not 100K.