By Jon Beddell
Foreign Currency Market Update – GBP / NZD Update
As the UK effectively ground to a halt over the last two weeks the celebrations were notably absent from the markets as Sterling continued to slide against most of its counterparts.
Last week’s main event (aside from the wedding) was the announcement of first quarter GDP, which came in at 0.5%, exactly in line with estimates. Sterling rallied momentarily but soon resumed the general weak tone. Interest rate expectations have been scaled back over recent weeks as a slight moderation in inflation, and the uninspiring growth data keep the Bank of England split on direction. With the tightening cycle already well underway in other parts of the world, and now starting to bite in Europe, for Sterling it’s a case of always the bridesmaid and never the bride. The Reserve Bank of New Zealand kept rates at 2.5% last week as expected in the wake of the recent earthquake. However, a strong rebound in business confidence, and a better than expected trade surplus for March add weight to the case for a resumption of the tightening bias at some point this year. Even at 2.5% the Kiwi yield is five times that of Sterling.
The pound was already starting from a loose footing in London this morning, so a weak manufacturing report was all the excuse it needed to head lower. The Purchasing Managers Index for Manufacturing came in at 54.6, well below the 57.5 reading expected, emphasising the fragility of the recovery and giving the BoE yet more ammunition to do nothing at Thursday’s monetary policy meeting.
This week’s data calendar will be dominated by house price surveys from Halifax and Nationwide tomorrow, followed by the interest rate decision on Thursday.
The technical outlook is very negative. Sterling is now testing record lows around 1.5150 against the Aussie dollar, and is only a handful of cents away from the 1.9860 low set against the Kiwi in January. The tide is very much in favour of a weaker pound, and in this climate we are urging clients to take a cautious approach and hedge any exposure now.