Political Risks Roil Currency Market, Pummeling U.K. Pound, Rand

  • Terms of Britain’s exit from EU spark speculation on impact
  • South African finance minister is summoned to face charges

How Much Lower Can Sterling Go?

Political risks upended foreign-exchange markets Tuesday, sending currencies from the British pound to South Africa’s rand tumbling.

The pound dropped to near the weakest level since 1985 as investors assess the nation’s economic outlook as it prepares to exit the European Union. The rand plunged the most in more than three months after the nation’s finance minister was summoned to appear in court to face charges. Haven demand drove the dollar to the highest level since July and pushed yen up against all major currencies.

Currency traders in the $5.1 trillion-a-day market have been caught off guard this year by the U.K.’s surprise vote in June to exit the EU, the contentious U.S. presidential election and the escalating turmoil in South Africa surrounding the status of Finance Minister Pravin Gordhan. Japan, a tradition haven, has benefited while the dollar has rallied since mid-August as a secondary refuge.

"There’s so much uncertainty that a lot of people have put their macro models to the side," said Vassili Serebriakov, a foreign-exchange strategist at Credit Agricole CIB in New York in an interview on Bloomberg Television. The pound "could go much lower in the short-term."

The rand fell 4.1 percent against the dollar as of 5 p.m. in New York, the largest drop since June 24. The pound dropped 1.9 percent, close to the weakest level since May 1985 reached Oct. 7. The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 major peers, rose 0.5 percent. The yen strengthened 0.1 percent to 103.51 per dollar.

Sea-Change

Sterling extended declines after Monetary Policy Committee member Michael Saunders said in written testimony that he wouldn’t be surprised if the pound falls further, while Financial Policy Committee member Anil Kashyap said that a so-called hard Brexit, where the U.K. gives up membership of the single market, may lead to a further drop in the value of sterling.

"For the time being, the path of least resistance is just to stay short the pound," Credit Agricole’s Serebriakov said.

While the U.K. struggles with more risks, markets are acknowledging that the level of political tension in the U.S. declined in the past week, helping to stem the fall in the Mexican peso. The currency touched a record low last month on speculation Republican nominee Donald Trump may win the election and rip up existing trade agreements with the emerging market.

South Africa’s rand slumped after Gordhan was summoned to appear in court, raising concern about fiscal policy as ratings companies prepare to review the country’s creditworthiness. S&P Global Ratings and Fitch Ratings have cited policy uncertainty as risks to the country’s investment-level debt ratings, which they are reviewing in December.

The political troubles helped to pare Bloomberg Dollar Spot Index’s loss this year to 2.5 percent, while the yen has gained 16 percent versus the greenback this year.

"We are now seeing there’s a sea-change taking place," said Hans Redeker, Morgan Stanley’s chief global currency strategist in London, in an interview on Bloomberg TV. "You have broader U.S. dollar strength and that is going to hit currencies."

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