Sterling Becomes A Pawn Sacrificed By Its King. By Gary Stride

A pawn is the most worthless piece on a chess board and sterling is pretty much in the same camp now after being sacrificed by its King.

Bank of England Governor Mervyn King told a regional U.K. newspaper Thursday that the current weakness of sterling is "very helpful" for the economic rebalancing process in the U.K.

And just for good measure King also made it public that two major British banks came within hours of a liquidity shortfall, or in plain speak 'going bust' last October.

The market, as ever looking for an easy victim sent the pound crashing across the board, and why shouldn't it.

A currency which the country's own central bank likes to see weak is obviously not an attractive investment, says Commerzbank analyst Ulrich Leuchtmann.

But it gets worse.

Leuchtmann notes that as the Swiss National Bank is currently demonstrating a central bank can weaken its currency almost at will as long as it doesn't have to take the consequence of inflation into account.

While the Swiss have no such problem at present the current measure of quantitative easing in place in the U.K. means that the markets are already expecting a clear rise in inflation as early as next year, even though growth rates will remain fairly negligible.

The Bank of England policy is already seen in a critical light before King's latest comments says Leuchtmann, and if he (King) keeps digging then he is clearly signaling that he doesn't care about this loss of trust, and that's another reason to sell sterling.

And QE itself is another other weight around sterling's neck.

While other members of the QE club are talking about exit strategies two members of the Bank of England's Monetary Policy Committee are still in favor of swelling the QE coffers by another GBP25 billion to GBP200 billion, and one of them is governor King.

UBS thinks the minority will get its way and expects QE to grow by another GBP25 billion as weak monetary indicators and a fragile housing market weigh on the economy.

And if you need yet another reason to sell the pound just look at libor rates.

Since September 1st, the sterling 3-month libor rate has fallen by 20% versus a decline of 9% for the euro, 7% for the yen and 13% for the dollar, notes CMC Markets Ashraf Laidi.

As sterling's decline intensifies and U.K. bank's remain under partial government ownership caution needs to be paid to any renewed doubts about the U.K.'s credit rating, says Laidi.

So how low can the pound go?

Well it's already trading at a 24-year low against the Australian dollar around AUD1.85 and against the Norwegian krone, whose central bank unlike that of the U.K. is just itching to hike interest rates. BNP Paribas has a target of a 32-year low at NOK9.13.

Against the euro parity remains BNP Paribas' long-term target but it will settle for GBP0.92 and then GBP0.9480 short-term.

Against the dollar, Commerzbank analyst Karen Jones says the loss of support at $1.6110 will have an initial target of $1.5690 and then $1.5270.

In Asia trade Friday sterling took another sharp dive with traders reporting larger stop loss orders triggered in sterling/yen. That cross fell some 200 sen to a fresh four-month low of Y144.30, taking the pound down with it to a fresh three-month low of $1.5915.

Around 0630 GMT the pound had recovered to $1.6018 which is still lower than its late U.S. level Thursday of $1.6060.

Against the euro the pound is trading at a new five-month low of GBP0.9190.

The euro is currently fetching $1.4692 from $1.4660 late Thursday, the dollar is worth Y90.53, down from Y91.27.