Sterling had already lost one percent against the Rand last week, and promptly lost a further three percent when things got nasty yesterday, the largest one day fall since March 2009 . Not a good start to the week! A weekend poll showing a high probability of a hung parliament set the scene for a wobbly week, but it was no one factor that triggered the big slide. Another contributor was Prudential's announcement that it will purchase AIG's Asian life insurance business. That will require the sale of a large amount of sterling to fund the $35bn price tag, most of which is to be paid in cash. Markets were also spooked by news items concerning Iran's failure to cooperate with nuclear watchdogs the IAEA. Sentiment toward the pound has been deteriorating sharply in recent weeks, and any one of these news items were excuse enough to cause a stampede for the exit. An apparent improvement in manufacturing activity was completely ignored, and mixed mortgage data did nothing to contribute. The prospect of low UK interest rates remaining static for a long period further differentiated the high yielding currencies, helping the Rand make hay from sterling's weakness. Firm commodity prices also made the Rand look a relatively low risk bet for once. Stock markets are also doing well, so investor risk appetite is buoyant, except when it comes to sterling.
The technical outlook is dire. We are trading at four year lows this morning, and momentum is extremely negative. The next noteworthy technical support is around 11.15, and below there a further fall to 10.50 would be likely. Despite the recent deterioration it would be prudent to cover at least half of any Rand requirement now to reduce risk. No one knows whether this is just the start of a sterling crisis, and all evidence points toward a lower pound.
