Latest Specific Currency Report - Sterling Vs. Kiwi Dollar 24th November 2009
Sterling 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.
Market Forecast - Sterling Vs. Kiwi Dollar - 03/11/09
The 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.
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