Market News

by Jon Beddell

Foreign Currency Market Update – GBP / NZD Update

Sterling has had a bad week. After making a new high above 2.20 in August the Pound has been dented in recent days as investors start to price in the distinct possibility that the revised second quarter growth figure of 1.2% may mark the high for this cycle, and the third quarter will show a slowing in the recovery. The prospect of a double dip does nothing for the pound, especially when combined with a moderating inflation outlook that will likely allow the Bank of England’s interest rate setting MPC to remain on the sidelines for the foreseeable future. In New Zealand interest rates stand at 3.25% compared to a paltry 0.5% in the UK. Having said that, interest expectations out there are now flattening as inflation starts to moderate.

The real driver of the Kiwi will be investor attitudes to risk. Stock markets are recovering strongly from recent lows, which helps the higher yielding currencies as investors pull money out of the US dollar and place riskier bets in more volatile currencies. Even during the recent stock market weakness the Kiwi did not suffer much. Although the big trade was buying the US dollar, investors were selling other currencies in equal measure rather than the dumping of high yielders that we have seen during other notable weak patches. The stock sell off never really developed into panic, which allowed the high yielding basket to treat water. If the stock recovery continues we would expect further strength from these currencies.

The technical outlook is positive for Sterling while the market trades above 2.10. Despite this week’s five cent sell drop we still have a tentative up trend in place, and this would only be broken with a move below 2.10. Buyers of the Kiwi may wish to place a stop order below 2.10 in case things get nasty. Sellers of the Kiwi should consider taking some risk off the table at current levels, especially as we are now touching trend support.

by Jon Beddell

Foreign Currency Market Update – GBP / NZD Update

Falling consumer confidence and house prices are stoking growing alarm at the prospect of a double dip recession. As the new government introduced the prospect of sweeping budget cuts ratings agencies applauded and sterling rallied, but the signs are that consumers took fright and confidence in the recovery was immediately dented.

The Pound has been creeping higher almost daily against the Kiwi over the last two weeks, even as the Reserve Bank of New Zealand raised interest rates by 25 basis points to 3% on July 28th.

The big news this week is that both the US Federal Reserve and the Bank of England gave gloomy economic updates and cut growth forecasts. The dollar rallied strongly as investors bought it for its safe haven credentials, selling almost any other currency in order to buy dollars. It’s the usual risk aversion story. Sterling did gain a cent yesterday as traders cut positions in higher yielding currencies slightly more than Sterling holdings, but so far we are not seeing the sort of spike in the Sterling/Kiwi rate that we have seen during previous sharp stock market corrections. The question now is whether the stock markets will continue to fall, and if they do, will we see a rout in the high yielding currencies like we saw in May when the exchange rate rallied by 15 cents (7.5%) in just a few days. It takes a large dose of investor fear to stoke that sort of move.

A general election in Australia next week is likely to keep the Aussie dollar in volatile mood, not least because the polls are showing an unexpectedly tight race between the governing Labour party and the Liberal party. That volatility may rub off on the Kiwi.

The technical outlook is mixed. We have a tentative uptrend in place since the May low, but the market has been struggling to make it above 2.20. We are approaching that resistance now.

by Jon Beddell

Foreign Currency Market Update – GBP / NZD Update

The pound bounced by seven cents from July 13th to July 19th, but gave back those gains last week, making a new four week low on Thursday even as UK retail sales data for June beat expectations. Things looked a little better on Friday. Second quarter GDP figures showed the UK economy grew at 1.1% in the second quarter, an improvement on the 0.3% first quarter figure and much better than analysts had expected. The pound rallied against all other major currencies, but gains against the high yielders were limited, and we are already flirting with new lows against the Kiwi this morning.

The Kiwi dollar has also been benefitting from US dollar weakness as investors continue to take on more risk and buy high yielding assets following the European bank stress test results on Friday. Only seven regional banks failed to make the cut, helping to calm investor nerves and add weight to the fragile recovery.

The Reserve Bank of New Zealand meet on Thursday, and are widely expected to raise interest rates to 3%, making that the second rate hike of the cycle following the 25 basis point move on June 9th. That prospect has been helping the Kiwi, and may continue to do so as investors price in further rate hikes over the coming months. By contrast, the Reserve Bank of Australia has already put in a series of rate hikes starting late in 2009, and is now expected to raise rates only once more before the end of the year. We may see the Kiwi start to outperform it’s Australian counterpart.

The technical outlook is not great. After making a marginal new high in early July we are right back at square one. A break below the June low at 2.0750 would remove the last hope of a trend reversal and give us every reason to foresee a return to the 2.0350 lows and beyond.

by Jon Beddell

Foreign Currency Market Update – GBP / NZD Update

Markets greeted the UK’s emergency budget with relief last week, bidding up the value of sterling as fears of a credit downgrade receded in light of positive initial comments by ratings agencies and economists. While making cuts that may dent economic activity, the new government also produced a set of modest 5 year growth projections that markets can believe in, and a plan to reduce borrowing from 10% of GDP to 1% over the same period. That the budget was not as bitter a pill as many expected did not dent the general perception that the government is taking action to address the deficit and by doing so putting the pound on more credible footing and preserve the UK’s all important AAA credit rating.

In New Zealand there was some positive data. The trade surplus for May came in above NZD$800m, and first quarter growth was a solid if not awe inspiring 0.6%.

The Sterling/Kiwi rate was given a second shot of adrenalin as world stock markets took a major dive last week, driven lower by fears of a Chinese and US slowdown. Recent negative US data including higher jobless claims and poor manufacturing numbers helped US stocks closed at a new 8 month low last night, stoking fears of a deeper correction that could keep investors looking for safe havens over the near term. That sense of investor risk aversion sent the high yielding currencies (which include the Aussie and Kiwi dollars) sharply lower over recent days as traders sell high these riskier currencies and move money into the Yen and US dollar, a phenomenon known as a “flight to quality”. This reaction has been seen several times over the last few years. Every time the markets hit a major hurdle, the Aussie and Kiwi dollars plunge. However, so far both have always recovered to new highs against both sterling and the US dollar once the fog clears and investors renew their search for a decent yield (The Kiwi dollar offers 2.75% compared to just 0.25% in the US and 0.5% in the UK). Talking of interest rates, last week’s Bank of England minutes showed that one of the nine member committee that sets interest rates actually voted to increase rates by 0.25% at the June meeting. Andrew Sentance was alone in wanting to raise rates, but it still gave markets the feeling that rates in the UK may go up in the foreseeable future, and that helped sentiment toward the pound.

The technical outlook for Sterling is positive in the short term. We have finally managed to make a “higher high” on the chart by breaking above the early June high of 2.20. That’s not enough to call this rally a new uptrend, but it does open up the possibility of a continued improvement. Clients with New Zealand dollar requirements should strongly consider hedging at least half of any exposure now while the going is good; or for those with appetite for risk, placing a stop order below 2.10 would limit the risk while allowing you to ride any further rally. Given the New Zealand dollar’s persistent tendency to bounce back after this sort of setback, we advise taking action to benefit from the improvement and protect yourself against losses. Speak to your account manager to discuss your options in more detail.

by Jon Beddell

Foreign Currency Market Update – GBP / NZD Update

After gaining over 7% in mid May Sterling is once again on the back foot against the Kiwi as a rebound in global stock markets prompt investors to buy higher yielding / higher risk assets. This improvement in risk appetite benefits currencies like NZD and AUD, while lower yielding currencies like Sterling and the US dollar suffer. While the Pound has been able to maintain its upper hand over the bedraggled Euro and the US dollar (which tends to sag as investors move money towards the high yielders) it is no match for the Kiwi, which stands to benefit both from the stock market bounce and from strong commodity prices. There wasn’t much on the data front to help. The UK’s trade deficit widened in April, and industrial production fell 0.4%. The Bank of England kept interest rates at record lows and are expected to keep them there for the rest of 2010.

Clients with Kiwi currency requirements should consider covering any exposure now. If risk appetite continues to improve the exchange rate could reach new lows before long. The path of least resistance is clearly down.

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!

by Jon Beddell

Foreign Currency Market Update – GBP / NZD Update

Britain’s economy grew by just 0.2% in the first quarter of 2010, much less than the 0.4% expected by analysts. The soft data released on Friday had an immediate impact on sterling, which retreated sharply, hitting the lowest levels against the Kiwi since April 1st. The New Zealand dollar strengthened further yesterday as investors looked ahead to the prospect of interest rate rises. That theme was buoyed today on news that Fonterra, the world’s largest dairy exporter said its farmer members will receive prices around 7% higher than expected for 2009-2010 production of milk solids. That increase adds around 0.3% to the country’s GDP.

It’s a big week ahead for the US data calendar, with the latest interest rate announcement from the Federal Reserve on Wednesday, followed by the first quarter growth figure on Friday. Interest rates are almost certain to stay on hold at the record low of 0.25%, but investors will be watching closely for any change in language. Specifically, the Fed’ have made a habit of stating that rates will remain low for “an extended period”. Markets are hanging on to that key phrase as a sign that rates will stay unchanged for the next few months. Dropping that phrase would therefore be the Fed’s warning to the market that a rate rise is on the way, and would negatively impact the high yielding currencies, which at present are continuing to benefit from investor risk appetite and the lack of yield on the US dollar. Analysts are expecting an annualised growth rate of 3.5% in the first quarter, compared to 5.6% in the last quarter of 2009. Interest rates aside, positive US economic data tends to add to the allure of the high yielding currencies. Investors take these US data as a sign of global recovery, and perversely, they sell the US dollar and buy the Australian and New Zealand dollars as appetite for risk increases along with their confidence in the global economic outlook.

The dominant story driving the pound this week is of course, the general election. Interestingly, sterling has actually been rising as the spectre of a hung parliament looms ever larger. The traditional view is that a hung parliament is bad news for the pound because no one party would have the clout to force through financial reforms and tackle the budget deficit. Press comment over the weekend has pointed toward other countries that have run successful coalition governments, in particular Germany, and the current strength of sterling against the euro may support that view.

Australian inflation data on Wednesday is expected to show an annualised inflation rate around 2.8%. On Friday a Reserve bank official said that interest rates are now “close to average”, indicating that the rate tightening cycle may slow. The RBA has raised interest rates several times over the last few months, most recently on April 6th when they raised the benchmark lending rate to 4.25%. The next policy meeting is May 4th, and following Friday’s comments futures markets are now pricing in a 26% chance of another rate hike, down from 40% before the comments were made. If Wednesday’s inflation data is higher than expected, the chances of another rate hike will increase, and that could drive AUD and NZD higher. Conversely, a figure on or below expectations should reinforce the “no change” view.

The technical outlook remains negative for sterling. Demand for the Kiwi remains very strong, and the fundamentals driving that demand are still very much in place. Stock markets are hitting new highs almost every week (stocks are a barometer of investor risk sentiment) and commodities are also rising. The price chart is still showing a down trend, and after a rally in late March the market appears to be turning lower again. Watch out for a return to the recent lows below 2.10. We continue to recommend a cautious approach, hedging at least half of any exposure at current levels.

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.

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.

by Jon Beddell

Foreign Currency Market Update – Sterling / New Zealand Dollar

Sterling had already lost two cents last week, and promptly lost another four cents when things got nasty yesterday, the largest one day fall since August 2009 . Not a good start to the week! A weekend poll showing a high probability of a hung parliament set the scene for a wobbly week, but it was no one factor that triggered the big slide. Another contributor was Prudential’s announcement that it will purchase AIG’s Asian life insurance business. That will require the sale of a large amount of sterling to fund the $35bn price tag, most of which is to be paid in cash. Markets were also spooked by news items concerning Iran’s failure to cooperate with nuclear watchdogs the IAEA. Sentiment toward the pound has been deteriorating sharply in recent weeks, and any one of these news items were excuse enough to cause a stampede for the exit. An apparent improvement in manufacturing activity was completely ignored, and mixed mortgage data did nothing to contribute. The prospect of low UK interest rates remaining static for a long period further differentiated the high yielding currencies, helping the Aussie dollar and it’s Kiwi cousin make hay from sterling’s weakness.

The sterling/kiwi rate is now testing record lows at 2.13. A break below here could trigger significant further downside, just as it has for the Aussie dollar. Buyers of the New Zealand dollar should cover at least half of any exposure now to reduce risk.