By Jon Beddell
Foreign Currency Market Update – GBP / NZD Update
The Bank of England kept rates on hold at 0.5% last week even as the European Central Bank hiked rates to 1.25%. Expectations of a UK rate hike have receded to June/July at the earliest despite stubbornly high inflation, and those expectations may have been pushed out further by this week’s news that inflation did moderate a little in March with consumer prices rising 4.0% on the year compared to the 4.4% expected (still twice the BoE’s target). On March 10th the Reserve Bank of New Zealand cut interest rates from 3.0% to 2.5% in response to the biggest earthquake the nation has seen in 80 years earthquake. Even with the rate cut the Kiwi soon found its feet, and has rallied by 8% against Sterling in the last four weeks. Some analysts are expecting the Kiwi to hit record highs this year as prices of its food exports continue to rise along with strong demand from China and other developing countries. RBNZ governor Allan Bollard warned a farmers group this week that rising food price inflation, while good for local producers will inevitably stoke inflation and lead to new interest rate rises later on.
Sterling looks highly vulnerable based on interest rates alone, offering virtually no yield, and based on recent performance a strong prospect of capital losses for those holding it! It will take solid evidence of economic improvement and higher interest rates to turn the Pound. One could argue that the Bank of England is happy enough to see a weak pound right now, as this helps the trade deficit by making exports cheaper for foreign buyers. On top of that, higher interest rates are likely to dampen domestic demand and dent tax receipts which works against the coalition’s attempts to balance the budget.
The technical outlook is negative for Sterling. The strength and speed of the recent falls indicated that there is probably more to come, and we are getting close to the record low around 1.99. Buyers of the Kiwi should consider covering any requirement now, using a forward contract if you aren’t ready to move your money yet.