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Quick thoughts as the NZD/GBP breaks to new NZD highs

Written by Sam Coxhead on June 24th, 2011.      0 comments

3:05 PM (NZT) The NZD/GBP pair continues to cause frustration for those looking to send money from UK accounts to NZ. Overnight the NZ dollar set new record highs against the Pound Sterling at .5096 (low GBP/NZD at 1.9621). This has driven by a number of different factors.
 
On Wednesday the Bank of England released its June Monetary Policy Committee meeting minutes. The minutes show that the committee are more dovish than previously expected and there have been discussions about further Quantitative Easing (QE) measures. Quantitative Easing is another tool used to try and boost economic growth, and is usually used only when the cash rate is bottomed out, such as it is now in the UK at .5%. Quantitative Easing is essentially the printing of money and is widely accepted as being currency negative. The GBP has responded accordingly by being sold off against almost all currencies on the back of these minutes being released.
 
Balancing arguments for further QE is the fact that inflation is already running at a massive 4.5%, and may well peak higher in the UK. To my mind it seems nonsensical to put in place measure that would increase inflationary pressure further, even if the medium term expectation was that the high food and energy prices would correct somewhat.
 
From the NZD side of the equation, there has been little in the way of domestic economic news this week, but yesterday the interest rate market saw another small move back higher in the short term interest rates in NZ , and this was NZD supportive. The higher yield in the NZD of late has underpinned demand. The increased size of the NZ bond market in 2011 has been a magnet for offshore capital, and this investor demand for NZ bonds has been a driver for the appreciation of the NZD. This, along with the earthquake re-insurance flows provide insight as to why the NZD has outperformed.
 
The GBP is currently seeing negative sentiment across the board , and this is unlikely to change in the near term. As has been said before, this points towards the view that any correction lower of the NZD against the GBP, is likely to be driven by NZD weakness. The softer nature of the commodity markets will help arrest some of the NZD strength. Crucial to the outlook is the fate of the Greek debt market. If we see another Lehman style credit event forced through a collapse in the bailout funding provisions for Greece, then the NZD should underperform as the global growth picture would change dramatically.
 
As usual there are a number of complex issues at play dictating the current market levels, and therefore the game becomes one of balancing probabilities. It is likely that every effort will be made to avert a default of debt payments by Greece in the shorter term. Is these short term measures are successful in avoiding a full scale debt default, then we are unlikely to see a dramatic under performance by the NZD in the short term.
 
Next week we have Business Confidence numbers in NZ, and Housing, Manufacturing and final reading GDP numbers in the UK to add colour to the picture.
 

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