Market Forecast - Sterling Vs. Kiwi Dollar - 19/10/09
The recent interest rate hike by the Reserve Bank of Australia took the markets by surprise, helping AUD and NZD march ever higher against a generally lacklustre pound. Gold continues to trade close to all time highs. Set against those tailwinds Australia had a higher than expected trade deficit in August, but jobs data for September showed a dip in unemployment. On balance, mostly positive for AUD, and that sentiment is rubbing off on the Kiwi, which reached a high of 2.13 last week.
Sterling enjoyed a strong rally into the end of last week after bullish comments from Bank of England policy maker Paul Fisher noting that quantitative easing is working well. The scene was already set for some sort of rebound after better than expected UK jobless figures, but the Fisher comments sparked a full blown "short squeeze" developed over the course on Thursday morning. A short squeeze happens when speculators who have sold the pound in expectation of further declines are forced to re-buy the currency to close their bets and stem losses. This situation can develop with little warning when large numbers of traders are caught "offside" when a market turns unexpectedly. The rebound looks to have run its course now, at least against the commodity currencies which are fighting back this morning against a backdrop of higher oil prices.
There is still some debate over whether the Bank of England may extend so called "QE" at the November meeting, but traders will be focussing on Wednesday's release of the October meeting minutes to get a real view of how that debate is looking inside the nine member Monetary Policy Committee.
The technical outlook is still negative. Today's chart includes a moving average which gives an idea of the trend (as if the price chart itself wasn't enough to determine that the trend is down!). We would need to see a lot more work by sterling to review our negative outlook.
The Reserve Bank of Australia raised interest rates yesterday in a surprise move. A quarter point hike puts the overnight rate at 3.25%, up from 3.0%. Analysts had widely expected no change, although there was an underlying impression that the RBA statement would include reference to possible future rate hikes. That move saw AUD rally fiercely as investors moved funds into the currency to take advantage of the higher yield. The New Zealand dollar also benefitted.
Sentiment towards the pound improved marginally as traders started to look forward to this month's Bank of England meeting this Thursday, with the all important quantitative easing package expected to remain on hold at £175bn; but that sentiment is overshadowed by the expectation that there may be an extension in November, leaving a cloud hanging over the market in the meantime. That may make it difficult for sterling to stage any sustainable rally in the short term. Data flow was mixed last week. The IMF upgraded its 2010 growth forecast for the UK (to 0.9% from 0.2%), but soft manufacturing data for September surprised to the downside as market watchers expected better figures off the back of higher exports. The Confederation of British Industry's retail sales figure was better than expected, and the final revision to Q2 GDP saw an improvement to - 0.6% from previously published -0.8%.
The commodity currencies have an extra tail wind this week. Gold is hitting all time highs (currently $1040 per ounce), and oil is also being dragged higher. That gives the NZD a further boost and is helping it make new highs against the pound this morning. In fact, the exchange rate is now trading at the lowest level since our records began in 1991, and there is no sign of a reversal coming.
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