Big Currency Declines
With the story of the day (so far) being the collapse in the British pound, several members have asked whether a major currency has ever suffered such a big drop when it was already at a low level.
The answer is yes, many times. Including the pound. Including recently.
Because of the various ways quote vendors account for trading hours for currencies, looking at one-day percentage changes can be tricky. For these purposes, we use Bloomberg spot price data versus the US dollar (and the DXY index for the dollar itself, to which this has never happened since 1980).
The following tables show every time that a major currency has declined 2% on the day, to trade at a 3-year low. The pound is recovering a bit as this is published and it may not qualify for the study if that continues.
First up is the pound. We can see that outside of the 2008 crisis period, the big drops coincided with exhaustive selling. In 1993 and again in June of this year, it fell several percent in the short-term, then when into a consolidation phase. With the Optimism Index below 20 again, it would be highly unusual to see the pound continue to slide uninterrupted in the weeks (and months) ahead.
Looking at the other currencies, it's hard to detect any kind of pattern. Generally, we could maybe say that more often than not, these moves indicated exhaustive selling and positive medium- to long-term returns but that's an iffy conclusion.