Latest Specific Currency Report - Sterling Vs. Kiwi Dollar 12/08/10
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.
Latest Specific Currency Report - Sterling Vs. Kiwi Dollar 27/07/10
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.
Latest Specific Currency Report - Sterling Vs. Kiwi Dollar 02/07/10
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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