by Jon Beddell
Foreign Currency Market Update – GBP / NZD Update
Sterling has not shown any decisive reaction to the eventual election outcome. We expected a coalition going into the vote, so the fact one has now been delivered has left the markets somewhat unsure of what to do next. The impacts of the power sharing set up may take some time to become apparent.
Bank of England governor Meryn King gave a nod of approval to the new government’s pledge to cut public spending by £6bn this year. Delivering the quarterly inflation report King warned that the UK economy was still in danger, but that the planned cuts would be useful in showing the markets that government was taking action, preventing a possible run on the pound and selling of UK gilts. We saw what happened with Greek, Spanish and Portuguese debt over the last few weeks and the new administration will be doubly keen to avoid a similar fate for gilts. When investors feel that a government may not be able to meet debt repayments as they fall due, they demand a far higher interest rate for investing in new government bond issues. Paying a high rate compounds the debt problems and can force a default. So taking steps to improve the market’s perception of how we are tackling our debt mountain is almost as important as reducing the deficit. The BoE believe inflation – which is currently well above the bank’s 2% target – will moderate back towards 2% over the next two years. That gives policy makers the flexibility to keep interest rates low for the short term.
The New Zealand dollar rallied yesterday after a report showed that manufacturing expanded at the fastest pace in five years during the month of April. There was also positive employment data from Australia showing that the economy added 33,000 jobs in April. Last week the Reserve Bank of Australia raised interest rates for the sixth time since October, taking the benchmark rate to 4.5%. That move was widely expected, and helps to keep the currency on the front foot, helping the Kiwi at by implication. New Zealand reserve bank governor Alan Bollard gave their last monetary update on April 29th, keeping interest rates on hold at 2.5%, but giving a clear indication that rates will rise soon as long as the economic recovery continues. The prospect of higher rates keeps demand for the Kiwi currency strong as investors look for currencies offering a decent yield.
The technical outlook remains negative for sterling. A strong down trend is still in motion, and we would need to recapture 2.18 in order to end the series of lower lows and lower highs. That’s 5% above the current market level, so it’s a big ask!
Related posts:
