by Jon Beddell
Foreign Currency Market Update – Sterling / New Zealand Dollar
Following last Monday’s dramatic declines things got a little better for sterling later in the week, but the relief was only a blip, and the down trend has resumed in earnest. The Sterling/Kiwi rate hit record lows yesterday after breaking below key support at 2.13. We are trading back above that level this morning after the Reserve Bank of New Zealand decided to keep interest rates at a record low (2.5%) at today’s meeting. Governor Alan Bollard cited weak business spending and higher bank funding costs as contributing to a “relatively sluggish” economy, comments that reined in expectations of a series of successive rate hikes that investors have been expecting to commence in June 2010.
A successful government gilt auction helped sterling recovery its poise last Tuesday after a Monday which saw the currency slide nearly five cents against Kiwi. The fact that investors are still happy to buy gilts (most of the demand was from pension funds and insurance companies) is reassuring, especially as buyers were bidding for twice the amount of stock than was on offer. That level of cover contrasts well with the March 2009 auction in which the government only sold £1.63bn of a £1.75bn offer, the first auction failure in 14 years. Another auction for £3bn of 2022 debt went well this week, achieving 2.01 times cover, but this was eclipsed by two other news items. Firstly the latest international trade figures which showed Britain’s trade deficit reaching £8bn in January, far higher than analyst expectations. This comes despite the weak pound, which should boost demand for British exports. That demand is crimped however by the weak state of the European economy, our main trading partner. This was the sharpest fall in exports since 2006.
Another blow came in the form of a report from credit ratings agency Fitch, who labelled Labour’s promise to cut the deficit in half by 2015 as “too slow”. This sort of report only helps to recycle the persistent speculation of a possible cut in the UK’s credit rating; and is very unhelpful to an already embattled pound.
The Reserve Bank of Australia raised interest rates again last week, bringing their official cash rate up to 4%. That move further increases the appeal of the currency when compared to sterling, and has a knock on benefit for the New Zealand dollar, despite the RBNZ today scaling back expectations for rate hikes in the near term.
The outlook for sterling remains poor. It seemed a forgone conclusion that we would be testing the 2.13 lows. The big question now is whether we rally from here, or slip through the lows and trend lower. If the sterling/aussie rate is anything to go by, the latter scenario looks likely. Clients with NZD requirements should consider covering at least half now, or alternatively, consider placing a stop order below 2.10 to protect against a renewed slide.
Related posts:
- Australian Dollar – The Reserve Bank of Australia unexpectedly raised interest rates
- The Pound fails to rally against the majors after the Bank of England raised interest rates for the fifth time in under a year
- The Pound declines against the majors after the Bank of England cut interest rates by 50 basis points, along with the Federal Reserve and ECB
- The Pound rallies above 1.2900 versus the Euro despite speculation that the Bank of England will cut interest rates by 50 basis points this week
- The Dollar remains largely unchanged as the Federal Reserve slash interest rates for the third month in a row
