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New Zealand dollar vrs Great British Pound

Written by Andrew Isbister on August 12th, 2011.      0 comments

5:22 PM (NZT) Continued levels of extremely high risk aversion and volatility have dominated trading this week. As a result currency moves have directly reflected the level of risk appetite in the market. When the risk appetite is nonexistent, growth currencies such as the NZD are dumped, and the traditional safe haven currencies, such as the YEN, CHF and USD are bought. GBP on the whole trades in a far less volatile manner, relative to the NZD, in these conditions and also under normalized market conditions. Risk appetite this week has been driven by rumors, as much as actual substantiated comments from the key players involved in the spiraling Euro zone debt crisis.
Late Monday saw risk aversion levels at the highest point of the week, as equity markets were crushed. The NZDUSD which had tumbled late the prior week from its .8843 recent high, briefly traded sub .8000 (a ten percent drop in little more than one week), with the NZDGBP diving to an interbank low of approximately .4950 (GBPNZD 2.020) as a result, a fall of 8.5%.
However as the week has worn on, tough talking rhetoric from numerous Govt. officials on both sides of the Atlantic have calmed the markets to some extent, with a bounce in equity markets and a return to some degree of the markets appetite for risk in the last 24 hours. This will no doubt be short lived, if the subsequent tough  decisions needed are not made and acted upon quickly. Given the severity of the issues at play, and the fact that there are no quick or easy fixes (if there were we wouldn’t now be in this mess!!), then the current risk on risk off trading mentality, with the subsequent massive swings in equity and currency markets, will continue for some time.
With the market driven in this manner, economic data releases which in normal market conditions have an overriding baring on currency direction, have largely been ignored. New Zealand didn’t have any tier one data out this week anyway, but in the UK, the Bank of England Inflation Report was this week’s key release event. The report was more dovish than their May Report, as was to be expected. Interest rates are likely to be on hold for longer, growth forecasts have been lowered, and further stimulus has not been ruled.
Today the NZDGBP is back trading “mid range” when compared to where it has been in the last two weeks, as equity markets have recovered a touch, and risk appetite has increased accordingly. Next week will continue to be dominated largely by the markets risk appetite. Whilst current levels present far better levels to buy NZD sell GBP than has been the case for some time, with risk aversion set to continue, the NZDGBP is likely to have further downside tests, at some point.
As I write we are currently trading in the interbank market at NZDGBP .5084 (GBPNZD 1.9669)