by Jon Beddell
Foreign Currency Market Update – Sterling / Australian Dollar
Sterling had already lost two cents last week, and promptly lost another five cents when things got nasty yesterday, the largest one day fall since October 2008 . 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 Aussie dollar make hay from sterling’s weakness.
The technical outlook is dire. We are trading at record lows again this morning, and momentum is extremely negative. It’s hard to advocate buying Aussie dollars at this extremely low level, but given the volatile nature of foreign exchange markets and the fact we do not know how nasty this crisis will get, it does seem that the prudent move would be to cover half of any AUD requirement now, and take a “wait and see” approach on the balance if time allows.
