Market Forecast - Sterling Vs. Kiwi Dollar - 26/08/09
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.
Market Forecast - Sterling Vs. Kiwi Dollar - 20/08/09
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 Bank of England 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 Bank of England 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.
Market Forecast - Sterling Vs. Kiwi Dollar - 10/08/09
In recent updates we expressed concern that the New Zealand dollar would outperform sterling as investors continue to take on additional risk in search of yield. We also suggested that a major technical breakout was on the cards because this exchange rate has spent so long trading in a well defined range. That's exactly what we are seeing now, as the Bank of England helped to push Sterling over the edge last Thursday by increasing the size of the quantitative easing package from £125bn to £175bn.
That move was well received by economists and the stock market, but not by the pound, which plunged two cents on the day, and broke through key support on Friday. Events are conspiring to drive this exchange rate lower as a better than expected jobs report in the US gave investors yet another reason to buy growth assets today, sending us another 3 cents lower. We are now testing the New Year lows around 2.44. A break below there would make 2.4125 the next key support. This level triggered rebounds in 2005 and 2008, though that is no guarantee that we will see a similar reaction now. While we cannot predict the future, all roads appear to head south, so we reiterate our recent advice. Clients with NZD requirements should consider covering now.
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