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.
Foreign Exchange Kiwi Dollar Update - Sterling Plunges on Election Worries
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.
Foreign Currency Market Update - Sterling / New Zealand Dollar
The New Zealand dollar has been taking advantage of a surge in the value of other commodity based currencies like the Canadian and Australian dollars, both of which have hit record highs against sterling this morning. That fact alone should put buyers of the Kiwi dollar on high alert.
The pound took a hit yesterday after data showed that the UK government borrowed a further £4.3 billion in January, a month where tax receipts usually result in a surplus. Analysts were expecting a net influx of cash into government coffers, but a 7.7% fall in tax revenues combined with a 9.7% increase in public spending meant the January account fell into the red for the first time in 17 years. The figures surprised the market, sending sterling lower across the board. Also on the data front the minutes from the last Bank of England meeting were released on Wednesday. All nine members voted to keep QE on hold, although some of the arguments between controlling inflation and protecting growth were finely balanced. This had a neutral impact on sterling as it was largely within the market's expectations.
The technical outlook is negative. The 2.30 level proved too much for sterling, sending it lower in late January, and again in early February. We now appear to be heading for the Jan' lows at 2.16, leaving only the October low at 2.13 to protect against plumbing new depths. Buyers of the Kiwi should look to cover at least half of any requirement now, and consider placing a stop order to protect the balance against further downside.
Stock markets fall, dragging higher yielding currencies lower.....Bank of England halts QE, for now.
Extract from our January 26th update:
".....weighing on sentiment toward the high yielders is the dramatic stock market sell off seen over the last few days. If that trend continues and develops into panic, we could see severe weakness in currencies like AUD, NZD and the Rand. Buyers of these currencies should therefore be on alert for opportunities."
Stock markets rebounded slightly early in the week, but took a major drubbing yesterday, falling to three month lows. The market has been left punch drunk by the latest sell off, and every indication is that investor fear levels are starting to rise. This is exactly the sort of catalyst that could spark a dramatic unwinding of the so called "carry trade", where investors have borrowed in low interest rate currencies like USD, JPY and even GBP, and sold those currencies to buy AUD. As the Australian dollar starts to weaken, traders may dump the currency as their losses mount, causing further weakness. That's precisely what caused the unprecedented moves back in October 2008 when the Sterling/Kiwi rate briefly hit 3.02.
The big fundamental news this week is that the Bank of England have opted not to extend the £200bn asset purchase facility that was designed to increase money supply in the banking system. The bank were faced with a decision between bolstering the somewhat anaemic economic recover, and stoking inflation after recent data showed inflation hitting 2.9%, well above the bank's 2% target. Over all sterling has shown little reaction to the widely expected outcome, trading flat against the euro, and falling against an overtly strong US dollar.
On the other side of the globe, policy makers kept Australian interest rates on hold. Traders had been expecting another rate hike to 4% (current rate 3.75%) and in the absence of that were inclined to sell the Aussie dollar, which also hurt the Kiwi by implication. The New Zealand dollar was also hit Thursday by a weaker than expected jobs report which showed the unemployment rate hitting a 10 year high of 7.3%.
The technical outlook is in sterling's favour as we approach key resistance levels at 2.30 and 2.33. If we could break above those levels things would start looking pretty good for the pound. In the meantime we advise clients with NZD requirements to consider covering half at current levels, and take a wait and see approach on the balance.
Any opinions expressed in this document are those of TorFX analysts. Any analysis and/or forecasts provided are aimed at helping clients understand market conditions and developing trends. Clients are wholly responsible for their own trading decisions.
FX168 Foreign Exchange - New Zealand Dollar Update
Market Update - GBP / NZDSince our last update, in which we voiced a cautiously optimistic tone for sterling, things have continued to improve. The pound rebounded strongly ahead of the October lows, helped in part by hawkish comments from Bank of England policy maker Andrew Sentance, prompting markets to start bringing forward expectations of a possible interest rate hike in the UK. Sterling's tailwind has been bolstered by talk of a +0.4% figure for fourth quarter GDP, but the figure came in at just 0.1% this morning, confirming that the country pulled out of recession at the end of 2009, but only by the finest of margins. Sterling has lost a cent on the news as disappointment sweeps the market.
The Kiwi dollar has been on the back foot this week on reports that China's central bank will raise reserve ratios for several key lenders, effectively tightening monetary policy by reducing lending and raising the interest rates required by lenders. Also weighing on sentiment toward the high yielders is the dramatic stock market sell off seen over the last few days. If that trend continues and develops into panic, we could see severe weakness in currencies like AUD, NZD and the Rand. Buyers of these currencies should therefore be on alert for opportunities.
The technical outlook is building in favour of sterling. We still have short term positive momentum backing the pound, but there is a major technical resistance level at 2.33. A break above there would be a very significant boost for sterling. Buyers of the New Zealand dollar hoping for a continued improvement should strongly consider placing a stop order to protect against a renewed slide. This is especially relevant given the recent rally.
Any opinions expressed in this document are those of TorFX analysts. Any analysis and/or forecasts provided are aimed at helping clients understand market conditions and developing trends. Clients are wholly responsible for their own trading decisions.
Market Update - GBP / NZDSterling dipped to around 2.16 last week, but now trades four cents better on the week after markets decided to give the pound the benefit of the doubt for once. Hawkish comments from BoE policy maker Andrew Sentance and chatter from other analysts point toward the probability that the bank will halt the monetary easing measures that have so dogged the currency over the last few months.
A snippet of good news for the pound last week came in the form of retail sales data for December, which showed that total sales rose 6% on the year, hitting a four year high, with food and drink being particularly strong. There are concerns however that data released on January 26th will show an end to the spending splurge and a resumption of the more cautious consumer behaviour we saw through most of 2009.
Much of the bad news is now reflected in sterling's historically low level, which means markets can be more reactive to positive data than the usual doom and gloom. There's still much work to be done though before we can confidently say we are out of the woods, and the twin clouds of QE and the general election are major hurdles. The minutes of the January BoE meeting will be the first clue as to the current outlook on QE, and could be a serious driver for sterling. They come out next Wednesday.
Any opinions expressed in this document are those of TorFX analysts. Any analysis and/or forecasts provided are aimed at helping clients understand market conditions and developing trends. Clients are wholly responsible for their own trading decisions.
Market Update - GBP NZDIn our last update of 2009 we reiterated the negative technical outlook for sterling, advocating a "buy now" approach in case of renewed downside for this exchange rate. Unfortunately that downside is now materialising. From a technical perspective it appears that the last three months respite have been merely a correction, and that the down trend is now reasserting itself. The Sterling/Australian dollar rate is hitting record lows today, and we don't think it will be long before GBPNZD tips below last year's 2.13 low.
Australian retail sales rose strongly in November, helping that currency surge, and dragging the Kiwi along for the ride. The data may spur a fourth consecutive interest rate hike in Australian, adding yet more fuel to the case for buying the antipodean currencies. However, the Reserve Bank of New Zealand are concerned that further strength in their currency could derail an economic rebound, and have resisted calls for rate rises so far.
The next key data for sterling will come out of today's BoE meeting and any actions the bank take over the next few weeks to clarify the position on quantitative easing. Will they continue to print money and support the gilt market for another few months, or will we be seeing talk of exit strategies, and if so, what effect will that have on sterling? Continued QE would almost certainly undermine the pound further unless it is accompanied by a clear road map pointing the way towards an exit, but an end to QE now could threaten the fragile recovery. We are stuck between a rock and a hard place, which is largely reflected in the current level of sterling, but given the tailwinds for NZD (which are partly derived from AUD fundamentals but also from the commodity rally and positive risk sentiment) we still advise a cautious approach to this market. That would suggest covering any NZD requirements now.
Any opinions expressed in this document are those of TorFX analysts. Any analysis and/or forecasts provided are aimed at helping clients understand market conditions and developing trends. Clients are wholly responsible for their own trading decisions.
FX106 Foreign Exchange - New Zealand Dollar Update
Market Update - GBP NZDAny jitters caused by the Dubai World default seem to have entirely evaporated, leaving the high yielders to drift higher along the path of least resistance. A sharp correction in gold prices has tempered any rally however, leaving the Sterling/Kiwi rate relatively unchanged from a week ago.
The general economic backdrop seems to support a resumption of the down trend soon. Risk sentiment is improving again after the Dubai "blip", and the Reserve Bank of Australia has just raised interest rates for a third successive month. A tightening cycle is already well underway there, and is likely to become a reality in New Zealand some time before the UK, who are expected to keep rates on hold at the Bank of England meeting this Thursday.
The technical outlook is still precarious. Sterling has been in mild recovery mode since October, but the rally is looking fragile, and a break below the November low at 2.23 would be enough for us to target a return to the 2.13 lows.
Any opinions expressed in this document are those of TorFX analysts. Any analysis and/or forecasts provided are aimed at helping clients understand market conditions and developing trends. Clients are wholly responsible for their own trading decisions.
FX083 TorFX Foreign Exchange - New Zealand Dollar Update
Market Update - GBP NZDSterling is performing a little better against the New Zealand Dollar than it is against its Australian cousin. It's up over 6% from its lows against the Kiwi and only 3.5% against AUD. There are two reasons for this. Firstly, the Aussie dollar is benefitting from two interest rate hikes in two months, giving it a 3.5% yield compared to 2.5% for NZD. Secondly the Australian dollar is more closely linked to the gold price, giving it another reason to outperform.
Despite this relative underperformance by NZD, we are still feeling very cautious on the GBP/NZD exchange rate. Share prices have rallied to new highs after last week's correction, helping the highs yielding currencies gain ground. Gold continues to soar to new all time highs on an almost daily basis, now trading at $1,168 per ounce, up 7% from when we sent our last report. If risk appetite holds up, we expect the Kiwi to strengthen again.
We've had a very mixed bag of data for the pound over the last week. Public sector borrowing was far higher than expected for October (£11bn versus £7bn expected) and traders are still concerned that further quantitative easing may lie ahead after last week's Bank of England minutes revealed that one MPC member voted for a £40bn increase. On the plus side, inflation for October was a healthy 1.5%, and we are expecting a slight upward revision to the preliminary estimate of third quarter GDP tomorrow.
The technical outlook remains negative, but would improve if we could just break above the early November highs around 2.3125. That would at least disrupt the series of "lower highs" that has dominated the chart for the last eight months. Our advice is to cover at least half of any NZD requirement at current levels to reduce risk, and take a "wait and see" approach on the balance. Clients should also consider using a stop order to protect against renewed downside.
Any opinions expressed in this document are those of TorFX analysts. Any analysis and/or forecasts provided are aimed at helping clients understand market conditions and developing trends. Clients are wholly responsible for their own trading decisions.
FX051 TorFX - Foreign Exchange New Zealand Dollar Update
Market Update - GBP NZDThe Reserve Bank of Australia raised interest rates today for a second time in two months. Israel and Norway are the only other nations to have started a new interest rate cycle in favour of monetary tightening. Having surprised the markets in October with a 25 basis point hike to 3.25%, the RBA gave the markets plenty of warning of today's rise, setting the scene for a muted market reaction. The Reserve Bank of New Zealand left their interest rate unchanged at 2.5% last week, but indications are that a rate rise is in the pipeline, possible before the year end.
Sterling was marching steadily higher through mid October until we hit a major stumbling block on Friday 23rd. Third quarter growth figures didn't show any growth at all. In fact the economy contracted by 0.4% instead of the 0.2% expansion that analysts were expecting. That prompted a vicious sell off, sending the pound two cents lower almost immediately. Last week was somewhat better as the stock markets finally entered correction territory, sending investors scurrying away from high yield currencies like the New Zealand dollar, and into more defensive plays including the dollar and pound. By Thursday/Friday the previous week's growth shocker was looking more like a minor blip as sterling rallied back to the levels it was trading at the start of October. Much now depends on the Bank of England meeting this Thursday (November 5th). It seems to have come around very quickly after they elected to keep interest rates and quantitative easing on hold in October. Another "no change" vote would certainly help sterling's cause this week, especially if the subsequent meeting minutes (usually released a few days later) show another 9-0 vote.
The technical outlook remains negative, although we are seeing some "green shoots" for the pound. The last two weeks' rally is too little to say the trend has changed. For that we would need to see a sustained improvement or signs of a real base being built. At the moment we have to view this bounce as a correction, and accordingly our advice is for NZD buyers to cover at least half of any requirement now while the exchange rate is trading over fifteen cents (or 7%) off the recent lows.
Any opinions expressed in this document are those of TorFX analysts. Any analysis and/or forecasts provided are aimed at helping clients understand market conditions and developing trends. Clients are wholly responsible for their own trading decisions.
The recent interest rate hike by the Reserve Bank of Australia took the markets by surprise, helping AUD and NZD march ever higher against a generally lacklustre pound. Gold continues to trade close to all time highs. Set against those tailwinds Australia had a higher than expected trade deficit in August, but jobs data for September showed a dip in unemployment. On balance, mostly positive for AUD, and that sentiment is rubbing off on the Kiwi, which reached a high of 2.13 last week.
Sterling enjoyed a strong rally into the end of last week after bullish comments from Bank of England policy maker Paul Fisher noting that quantitative easing is working well. The scene was already set for some sort of rebound after better than expected UK jobless figures, but the Fisher comments sparked a full blown "short squeeze" developed over the course on Thursday morning. A short squeeze happens when speculators who have sold the pound in expectation of further declines are forced to re-buy the currency to close their bets and stem losses. This situation can develop with little warning when large numbers of traders are caught "offside" when a market turns unexpectedly. The rebound looks to have run its course now, at least against the commodity currencies which are fighting back this morning against a backdrop of higher oil prices.
There is still some debate over whether the Bank of England may extend so called "QE" at the November meeting, but traders will be focussing on Wednesday's release of the October meeting minutes to get a real view of how that debate is looking inside the nine member Monetary Policy Committee.
The technical outlook is still negative. Today's chart includes a moving average which gives an idea of the trend (as if the price chart itself wasn't enough to determine that the trend is down!). We would need to see a lot more work by sterling to review our negative outlook.
Any opinions expressed in this document are those of TorFX analysts. Any analysis and/or forecasts provided are aimed at helping clients understand market conditions and developing trends. Clients are wholly responsible for their own trading decisions.
The Reserve Bank of Australia raised interest rates yesterday in a surprise move. A quarter point hike puts the overnight rate at 3.25%, up from 3.0%. Analysts had widely expected no change, although there was an underlying impression that the RBA statement would include reference to possible future rate hikes. That move saw AUD rally fiercely as investors moved funds into the currency to take advantage of the higher yield. The New Zealand dollar also benefitted.
Sentiment towards the pound improved marginally as traders started to look forward to this month's Bank of England meeting this Thursday, with the all important quantitative easing package expected to remain on hold at £175bn; but that sentiment is overshadowed by the expectation that there may be an extension in November, leaving a cloud hanging over the market in the meantime. That may make it difficult for sterling to stage any sustainable rally in the short term. Data flow was mixed last week. The IMF upgraded its 2010 growth forecast for the UK (to 0.9% from 0.2%), but soft manufacturing data for September surprised to the downside as market watchers expected better figures off the back of higher exports. The CBI's retail sales figure was better than expected, and the final revision to Q2 GDP saw an improvement to - 0.6% from previously published -0.8%.
The commodity currencies have an extra tail wind this week. Gold is hitting all time highs (currently $1040 per ounce), and oil is also being dragged higher. That gives the NZD a further boost and is helping it make new highs against the pound this morning. In fact, the exchange rate is now trading at the lowest level since our records began in 1991, and there is no sign of a reversal coming.
Any opinions expressed in this document are those of TorFX analysts. Any analysis and/or forecasts provided are aimed at helping clients understand market conditions and developing trends. Clients are wholly responsible for their own trading decisions.
Sterling plunged this morning, spooked by a series of negative news reports and comments from Bank of England governor Mervyn King saying that sterling weakness was "helpful" in rebalancing the UK economy. We have been hinting at the BoE's implicit approval of sterling's slide for the last few weeks, and now they have come right out and said it! That is unhelpful for the pound, which was just starting to gain a little traction yesterday following the release of the most recent BoE meeting minutes which showed that all nine members voted to keep the central bank's assets purchase programme (otherwise known as quantitative easing) on hold at £175bn. King's comments have overshadowed the relief rally that we saw yesterday, and sterling is now trading at its lowest level against the Aussie dollar since our charts begin in 1991.
The Sterling/Kiwi exchange rate is now testing all time lows (at least as far as our charts go back, circa 1991), and with Sterling/Aus' making breaking below its 1991 low today, there's no reason to think this market won't follow. We continue to advise clients to cover at least half of any NZD requirement now to avoid the risk of further downside.
Any opinions expressed in this document are those of TorFX analysts. Any analysis and/or forecasts provided are aimed at helping clients understand market conditions and developing trends. Clients are wholly responsible for their own trading decisions.
Things were starting to look better for Sterling late last week as the latest Bank of England decision reassured investors. The lack of any further quantitative easing ("QE") gave traders a reason to buy the pound for once. Unfortunately that reason was removed yesterday as BoE governor Mervyn King gave another gloomy update in his quarterly inflation report. Labelling the durability of the recovery as "highly uncertain", he indicated that further easing could be in the pipeline. Inflation figures for August were slightly higher than expected, but this failed to offset the comments.
Meanwhile, the New Zealand dollar has been capitalising on sterling's weakness and also received a further tailwind after the Reserve Bank of New Zealand kept interest rates on hold at 2.5% at the latest meeting. More significant than the decision itself was the removal of the phrase "the OCR [official cash rate] could still move lower over the coming quarters". That change put investors on notice that interest rates have probably bottomed out and that the next move could be up.
The technical outlook for sterling remains bleak. There is no noteworthy technical support until the 1996 lows at 2.2250, and unfortunately no sign that sterling's decline is coming to an end.
Any opinions expressed in this document are those of TorFX analysts. Any analysis and/or forecasts provided are aimed at helping clients understand market conditions and developing trends. Clients are wholly responsible for their own trading decisions.
Sterling jumped yesterday after the Bank of England left interest rates unchanged at 0.5% and made no further increases to the quantitative easing programme. The pound has been on the back foot since last month's central bank meeting at which they raised QE from £125bn to £175bn. The minutes of that meeting showed that three of the nine strong committee actually voted for a larger increase, putting the markets on notice that further increases were likely. More QE means more money in the system, effectively devaluing the pound against its peers. Traders reacted with relief, bidding the pound higher in the short time since the noon announcement. We will have to wait a few days for publication of the minutes of today's meeting to show how last month's 6-3 skew may have changed.
Meanwhile, the New Zealand dollar has remained generally well bid as gold continues to flirt with the key $1,000 per ounce mark. Stock markets are also performing well, keeping investor risk appetite buoyant and supportive of high yielding currencies. Strong bank lending data from China also helped the Aussie and Kiwi dollars today. While sterling's technical outlook against the Euro and US dollar have improved on yesterday's bounce, the Sterling/Kiwi rate is still on shaky ground, with no clear sign that a low may now be in place. Clients with NZD requirements should remain cautious, and consider covering at least half at current levels.
Any opinions expressed in this document are those of TorFX analysts. Any analysis and/or forecasts provided are aimed at helping clients understand market conditions and developing trends. Clients are wholly responsible for their own trading decisions.
The spectre of further quantitative easing is still hanging over the pound, giving traders a green light to sell the currency. Data flow was also unsupportive, with a small upward revision in second quarter growth (up to - 0.7% from original estimate of -0.8%) being more than offset by better growth data from Europe which showed economic expansion for France and Germany over the same period. Comparatively speaking that leaves the UK clearly lagging, and that is being reflected in the Sterling/Euro exchange rate. Meanwhile, The New Zealand dollar is still generally well supported as investors seeking more risk and yield continue to buy the currency. That trend took a knock on Tuesday as the US stock market suffered its largest one day decline in 2 months, sending the Aussie and Kiwi dollars a couple of cents lower. However, the markets stabilised, and NZD is already clawing back those losses. Yet another tailwind for the "commodity" currencies this week has been a strong rally in gold prices, with the precious metal now challenging the key $1,000 per ounce mark.
This afternoon sees the release of key US jobs data which could have an impact on stock markets, feeding through to high yield currencies. Good data should mean stocks rally and NZD strengthens further. Shockingly bad data could cause a stock market wobble and weakness in NZD.
In short, there is no reason to think that the pound's decline is coming to an end. Buyers of NZD should strongly consider hedging any exposure now to avoid the risk of further downside.
Any opinions expressed in this document are those of TorFX analysts. Any analysis and/or forecasts provided are aimed at helping clients understand market conditions and developing trends. Clients are wholly responsible for their own trading decisions.
In last week's update we warned that the main drivers of NZD strength were still very much in place. Meanwhile sterling remains vulnerable to continued weakness as market participants fret over the possibility of further increases in quantitative easing after the Bank of England minutes revealed that three of the nine member committee voted for a larger increase than the £50bn agreed in August. These themes continue to dominate, and with stock markets rising (and risk appetite along with them), the Kiwi is still a favourite and likely to remain so.
The technical outlook is getting even worse. The exchange rate has now broken below the 2.40 support level which marked the low points in 2005 and 2008. We are dropping to 12 year lows as I type, and there are no new support levels until 2.25, the 1997 low. Today's chart shows the rate from 1997 to present.
We cannot always be as accurate as we have been lately, as forex markets can be as unpredictable as the data flows that drive them. Having said that, sterling looks extremely weak, and the market is lacking any clear reason to buy the pound. We therefore maintain our negative view on this exchange rate and advise clients with NZD requirements to consider hedging now to avoid further downside.
Any opinions expressed in this document are those of TorFX analysts. Any analysis and/or forecasts provided are aimed at helping clients understand market conditions and developing trends. Clients are wholly responsible for their own trading decisions.
After seeing lows below 2.41 the exchange rate bounced a little toward the end of last week as stock markets entered a correction, giving investors an excuse to book profits on riskier assets.
Things were also starting to look a little better after a higher than expected July inflation figure boosted confidence in the pound. The bounce was short lived though after yesterday's release of the minutes from the recent Bank of England meeting. Only six of the nine member committee voted for a £50bn increase in quantitative easing, with the other three (including influential BoE governor Mervyn King) voting for a larger £75bn increase. That puts the markets on notice that further easing may be in the pipeline, casting an ominous cloud over sterling. In extending help to the economy, the BoE are inevitably and perhaps deliberately denting the pound. A weaker pound helps narrow the gap between imports and exports as UK goods become cheaper to foreign buyers. Quantitative easing effectively pumps new money into the financial system to alleviate clogged up credit markets, but just like any other market, by increasing the supply of money policy makers risk decreasing the value of each currency unit in relation to other currencies. Central banks around the world have adopted similar QE tactics, but this week it is sterling that is in the spot light.
Last week's partial recovery did not do enough to convince us that anything has changed. Stock markets are in rally mode again, and the Kiwi is looking firm, having spent the week in a narrow range. The danger is still very much toward a stronger Kiwi and lower exchange rate. Clients should consider covering any NZD requirement now, or placing protective stop orders beneath the recent lows.
Any opinions expressed in this document are those of TorFX analysts. Any analysis and/or forecasts provided are aimed at helping clients understand market conditions and developing trends. Clients are wholly responsible for their own trading decisions.
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