The Pound to New Zealand Dollar exchange rate fell back from its best levels in seven-months on Thursday as investors finally began to return to the risky ‘Kiwi’.
Wednesday saw GBP NZD hit 1.80 – its best level since September 2016, due to risk-averse movement.
While market still don’t have the strongest appetite for risk this week, the New Zealand Dollar recovered from its worst levels on Thursday due to the appeal of its high yields.
As New Zealand has one of the highest interest rates of the major economies, the New Zealand Dollar is often favoured by traders looking for high yields, even in times of low risk-sentiment.
So why are traders suddenly looking for higher yields on Thursday? This has been primarily due to surprisingly dovish comments made by US President Donald Trump.
In a whirlwind of comments that appeared to dial back on narratives he adopted during the campaign trail, Trump stated during Wednesday’s American session that he favoured the US having low interest rates – and even that he liked and respected Fed Chairwoman Yellen.
Trump had previously been highly critical of the Federal Reserve and Chairwoman Janet Yellen due to its highly accommodative monetary policies.
The US President had also gone back on criticisms of China, stating that the nation is ‘not currency manipulators’ while stating the US Dollar was too strong.
These statements had a direct effect on global foreign exchange markets, including the New Zealand Dollar. With analysts concerned that Trump would try to keep the US Dollar weak or US interest rates weak (or both), investors looked for assets promising higher yields.
So what does this mean in the long-term? The Federal Reserve continues to indicate that it will hike US interest rates another two times in 2017, but Trump’s stance could severely weigh on bets that rates could continue climbing in 2018.
Some analysts have even speculated that Trump will consider replacing Yellen with an even more dovish Fed Chair in 2018, despite speculation mere months ago that he would replace her with a hawk.
This is highly important for New Zealand Dollar trade. The possibility of US interest rates rising has been a significant downside risk for the ‘Kiwi’ in recent months.
If Trump continues indicated tat he wants a weak US Dollar and low US interest rates in the coming months, the New Zealand Dollar could continue to benefit.
It’s also highly possible the mid-term Pound outlook could see the British currency becoming volatile or falling on Brexit negotiations or slowing UK growth.
As a result, despite its recent strength, there could still be lows ahead for the mid to long-term Pound to New Zealand Dollar exchange rate.
At the time of writing this article, the Pound to New Zealand Dollar exchange rate trended in the region of 1.79. The New Zealand Dollar to Pound exchange rate traded at 0.55.
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