The Aussie, the Kiwi and the Loonie- will the good old days of two or three to the pound return?

GBP/AUD: 1.56

GBP/NZD: 2.10

GBP/CAD: 1.56

These are the current interbank rates for sterling against the aussie, the kiwi and the loonie (Canadian dollar). Four years ago, one pound would buy you two and half aussie dollars, almost three kiwi dollars, and well over two Canadian dollars. These levels are reflective of historically riskier currencies versus the size and safety of the UK economy in years gone by. So, will we see these sorts of levels again or must be consigned to a new trading range?

In the case of the export-driven Australian and New Zealand economies, these have benefitted on a huge scale from the rise of China. Now the world’s second largest economy, China is a major trading partner to these two antipodean nations, and with commodity prices so high, their currencies have appreciated strongly. The higher interest rates of these two economies has for the past few years also provided investors with a far higher yield than those available in the UK, the US or Japan for example. This interest rate differential is set to be maintained for at least the next couple of years to come. The global recession hit the UK far harder than either Australia or New Zealand and it will take some time yet before a full recovery is established and it cope with fully normalised monetary policy (ie higher interest rates).

The loonie has also had reason to perform well, though for different reasons. Canada’s economy has benefitted from a broad rise in oil prices and from improving conditions in the US economy, its main trading partner. Canada’s economic fundamentals are solid – far more so than the UK’s - and the loonie had appreciated against the pound despite having equally low central bank interest rates.

None of the factors that have caused these ‘growth-linked’ currencies to appreciate against the pound, particularly the strength of the world’s two largest economies, look likely to fade any time soon. It would therefore be of huge surprise even in the long term to see a return of the levels of four years ago. The outlook for the British economy, in comparison to the “riskier” ones discussed above, looks distinctly pessimistic. With UK suffering economic contraction in the last quarter of 2010 and continuing to struggle with persistently high inflation, it might be argued that sterling is presently a riskier currency than the aussie dollar on a fundamental level. The day the pound has fully regained, for instance the near 40% it has lost against the aussie in the past 4 years, looks a very long way off indeed.

Although we actually view sterling to be undervalued at present (many others do not), it certainly appears that the current lowly trading ranges are set to continue for some time.

Richard Driver
Analyst – Caxton FX


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Data revealed a growing confidence among New Zealand businesses, which has driven the pound down further

The pound reverted back to its downward trend against the kiwi in trading yesterday, losing 0.8% to close the day near last week’s lows at 2.2163.

• A strong jump in a New Zealand business confidence survey added to evidence that the economic recovery is gaining pace, supporting demand for the kiwi.
  
• The Reserve Bank of New Zealand published a bright economic outlook yesterday, which was also picked up on by investors with expectations for a rate rise strengthening.
  
• Additionally, in the US, the second quarter GDP figure was revised upward revealing that the economy had contracted by less than initially expected, which supported a move into riskier assets, although weak employment data did offset this trend slightly.
  
• In trading this morning, the pound has lost further ground, with the price edging down below 2.21 as confidence in the kiwi remains strong.
  
• However, analysts have stated that the New Zealand dollar may cap its advances with investors unwilling to chase the currency ahead of US payrolls and manufacturing data later this week.

New Zealand dollar remains in recent ranges

The New Zealand dollar remained in recent ranges yesterday, despite figures revealing a slip in consumer confidence. Markets had expected a decline in this figure, reflecting the gloomy economic environment, but were in fact surprised the decline was so modest. Investors will now focus on key domestic data out over the next two days, which includes Gross Domestic Product data this evening.

New Zealand dollar battered by risk aversion

The New Zealand dollar was battered against the pound yesterday as tumbling stocks pushed investor risk aversion higher. Fears of a downturn in Europe and further weak data out of the US had demand for higher yielding currencies fall sharply. With only second tier data due over the next few days the kiwi will be lead by global market movements.

New Zealand dollar remains range-bound

The New Zealand dollar remained largely range bound yesterday, gaining some support from jobs data. The jobless rate rose to 4.6 percent in the fourth quarter, however 21,000 jobs were added in the same period. The numbers backed a case for the central bank to cut rates by smaller increments rather than larger ones. The kiwi was also aided by an improvement in investor risk appetite.

New Zealand dollar rebounds

The New Zealand dollar rebounded against most of the majors yesterday after it was aided by an easing in global risk aversion. With no major local data out, the kiwi was directed by broader market movements. Markets are speculating that the NZ central bank still has more work too do, which is likely to keep the kiwi generally weaker in the short to medium term.