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.
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