Perhaps.
Took a stop-loss on the British pound which fell 2 cens in a few minutes; its recovering a little and the position is a bit better now.
The yen added a bit to its gains from recently, now good below 120.
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Sterling sinks on shock Treasury studies
By Carolyn Cohn
LONDON (Reuters) - The pound has sunk by more than a penny against the euro and two cents against the dollar as markets revise down likely levels at which sterling would join the euro, following UK government studies.
The pound's equilibrium rate was equivalent to 75-85 pence per euro, according to the Treasury's background studies for the government's assessment of the economic case for euro entry, much lower than most analysts' forecasts of a likely euro entry rate.
"It's astonishingly weak," said Nick Parsons, currency strategist at Commerzbank (Xetra: 803200.DE - news) .
"It would imply a euro entry rate of 75-85 pence, as opposed to the 65-75 pence that markets anticipate."
The euro soared by more than a penny within 20 minutes of the announcement to 71.41 pence before easing to 71 pence by 0950 GMT. Sterling plummeted by more than two cents against the dollar, to $1.6428, before paring losses to $1.65.
The Treasury rushed to soothe the situation, with a Treasury spokesman saying the British government's objective was for a stable and competitive pound, and that the estimate, by Professor Simon Wren-Lewis, was one of 18 studies published on Monday.
"The market probably overreacted and saw the figures as an official level for euro entry rather than an academic study," said Mitul Kotecha, global head of foreign exchange research at Credit Agricole Indosuez (Paris: 4791.PA - news) .
"It may have the Treasury's stamp on it but the figures are from Wren-Lewis, who is an academic, not Brown."
BROWN NOT READY?
British Finance Minister Gordon Brown gives his assessment of Britain's readiness to join the euro at 1430 GMT, and a "not yet" verdict is widely expected.
Analysts had thought sterling was already trading at levels acceptable to euro entry, although public opposition towards joining the single currency is strong.
The Treasury's 18 studies, running to over 1,700 pages, said Britain's housing market made it more sensitive to interest rate changes than most of the 12 countries in the euro zone and that progress on labour market flexibility in the European Union lagged the UK and had been slow to pick up.
The Treasury studies also said recent movements in the exchange rate and current accounts threw some doubt on the estimates at the lower end of the range, and that a new model gave a medium-term equilibrium exchange rate for sterling of 1.37, or around 73 pence per euro.
"This rate will now be an anchor for long-term sterling expectations," said Michael Metcalfe, senior strategist at State Street (NYSE: STT - news) .
Following the spot move, short-term euro/sterling implied volatility surged, with one-month hitting 9.1 percent its highest since September 2001. Implied volatility reflects investor expectations of future currency movements. |
