Latest Specific Currency Report - Sterling Vs. Aussie Dollar - 25/03/10
The Aussie dollar remains in high demand, hitting record highs against the Euro today, and also trading towards the recent highs against sterling.
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 Australian currency 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.
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 still consolidating at record lows, and each little bounce us met with a new wave of sterling weakness. It looks highly likely that the slide will resume in due course. Buyers of the Australian currency should look to cover at least half of any requirement now to reduce risk. Those with little appetite for risk should cover all exposure.
Latest Specific Currency Report - Sterling Vs. Aussie Dollar - 11/03/10
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.
Latest Specific Currency Report - Sterling Vs. Aussie Dollar - 02/03/10
Sterling had already lost two cents last week, and promptly lost another five cents when things got nasty yesterday, the largest one day fall since October 2008. 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 make hay from sterling's weakness.
The technical outlook is dire. We are trading at record lows again this morning, and momentum is extremely negative. It's hard to advocate buying Aussie dollars at this extremely low level, but given the volatile nature of foreign exchange markets and the fact we do not know how nasty this crisis will get, it does seem that the prudent move would be to cover half of any AUD requirement now, and take a "wait and see" approach on the balance if time allows.
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