by Jon Beddell
Foreign Currency Market Update – New Zealand Dollar Update
The New Zealand dollar remains in high demand, hitting record highs against sterling today.
On the data front, a dip in inflation helped to confirm the Bank of England’s view that price inflation will continue to moderate, but it doesn’t do anything for interest rate expectations, which still price in very little tightening in 2010, implying that the New Zealand dollar will maintain or even extend its yield advantage. The Consumer Price Index fell to 3% in February from 3.5%, a big drop but still well above the BoE’s 2% target. The budget (or should we say the pre election budget, for there is certainly more to come once the election is out of the way!) delivered no market moving surprises, but did remove at least some of the short term uncertainly hanging over the pound. Nevertheless, sterling fell to a two week low against the US dollar and other currencies, while the real focus was on the euro, which posted sharp losses across the board.
In New Zealand the most important statistic to emerge was confirmation that the economy grew by 0.8% in the December quarter, far more impressive than the anaemic 0.1% achieved by the UK.
A credit downgrade for Portugal helped the US dollar yesterday, but the flight into US dollars was limited mainly to selling of the euro and yen, and did not spread to selling of high yielding currencies as is often the case when a major structural event hits the markets. Stock markets have hardly blinked, with the Dow Jones easing back slightly from 18 month highs yesterday. It was Portugal yesterday, but Spain is also a talking point in the markets, and long suffering Greece still has no clear rescue plan. As long as the negative sentiment surrounding these sovereign debt stories doesn’t spread to equity markets the high yielders (of which the Aussie dollar is one) can continue to strengthen. The fact that Spanish national debt is yielding 3.82% versus 3.97% for sterling 10 year gilts means that even after this week’s heightened fears over the state of the euro zone economies, investors still demand a higher return on UK debt because they view it as a higher risk. Hardly a ringing endorsement of the UK’s position despite the fact that Gordon Brown recently rebuffed suggestions that the UK’s AAA rating is also in danger of a downgrade.
The technical outlook is dire. We are sliding to record lows as I type, and with no obvious reason to speculate on a possible turnaround we advise clients to cover at least half of any requirement now to reduce risk. Those with little appetite for risk should cover all exposure.
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