The pound is trading near six-month lows against the euro; the Australian currency is at post-float highs against the US dollar; and the euro is also at 15-month highs against the greenback. Most would agree that these levels – as well as many other pairings at present – do not reflect fair value. However, there is a great deal of benefit to be had in the longer term from having an undervalued currency.
A weak currency provides a real boost to the country’s exporters and this has been targeted as a key route to recovery by many global economies, in particular the UK. Britain needs to rebalance its economy and in the longer term a weak currency should encourage that process. Unfortunately it also exacerbates inflationary pressures, but there can be little doubt that over a longer time frame, the British economy stands to benefit from a lower pound – even if that isn’t immediately apparent for those heading abroad this Spring!
The US dollar is also very weak at present, and this has become the subject of some debate. As a major importer, the US does not necessarily stand to benefit from a weak currency and indeed the Fed has reiterated its commitment to a strong dollar. Its market value tells a different story however, and the greenback is unlikely to claw back losses until the Fed take steps toward tightening monetary policy.
The Chinese yuan has been at the heart of the ‘currency wars’ debate. The Chinese export sector has been booming on the back of a hugely undervalued yuan, much to the consternation of other countries. With inflation particularly high in Asia, China is now beginning to allow the steady appreciation of its currency, but this will be a slow process. China can ill afford to slow its rate of growth too drastically.
The countries that have shown extraordinary resilience to the strength of their currencies include Canada, Australia, and New Zealand., which have all reached multi-year highs against the US dollar in recent months. This strength, though warranted, is far from supportive for the economy and Canadian policymakers in particular have expressed their concern. We’re certainly unlikely to see any material intervention in the market to curb this strength, but comments talking down the currency should have the same effect.
In the case of Australia, such is the demand from China’s booming economy that exporters appear capable to withstand the strength of the aussie dollar. High levels of risk appetite combined with soaring commodity prices look set to keep higher-yielding currencies well-supported throughout year. Indeed the aussie and kiwi dollars could have even further to climb in the short term; who would want to bet against them frankly? These currencies may well be overvalued, but a turnaround in trend remains a distant prospect at best.
Richard Driver
Senior Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Showing posts with label New Zealand dollar. Show all posts
Showing posts with label New Zealand dollar. Show all posts
Tuesday, 26 April 2011
Monday, 4 April 2011
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
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
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
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Monday, 14 March 2011
Japan announces a major round of quantitative easing: how will the yen fare in response?
Reacting to the devastating impact of the earthquake that struck on Friday, the Japanese central bank has announced its intention to pump a record ¥15tn into the economy ($183bn). This follows the reaction of the Reserve Bank of New Zealand to the earthquake that struck Christchurch, which opted to cut rates by 0.50%. With Japanese interest rates currently at next to nothing (<0.10%), the Bank of Japan clearly can’t follow suit, and has therefore opted to loosen monetary policy through flooding the money markets and buying government bonds.
The two countries’ approaches are alternative ways of achieving the same basic goals - to give consumers ‘a break’ in amid social upheaval and to provide support to fragile economic growth.
The so-called policy of quantitative easing that Japan has announced this morning invariably has the effect of weakening the economy’s national currency. The US Federal Reserve’s ‘QE II’ program has been responsible for the dollar’s woeful underperformance over the past year or so. Money-printing increases supply, thus weakening the currency as demand eases.
Accordingly, the yen declined against 13 of its 16 major counterparts as markets reacted to the news. However, just as the New Zealand Dollar did in the immediate aftermath of its rate cut last week, the yen has rebounded relatively strongly. There is a sense that New Zealand’s economy may eventually benefit from Christchurch’s disaster, with its construction sector in particular expected to enjoy strong growth. The same was thought of the Japanese construction sector but the apparent devastation suffered in the country’s north-eastern region seems set to provide a genuine setback to the Japanese economy in 2011. The country has suffered major damage to its infrastructure- most notably its roads and highways, factories and nuclear plants.
Fundamentally, we can be pretty confident of one thing- the yen will not strengthen this year. The Japanese government has this morning said as much. It threatened intervention to curb any sudden yen appreciation, asserting that it “will take decisive steps if necessary” (indeed the BOJ acted on their threat in September last year, though the impact was fleeting). So anyone hoping for a yen appreciation to mirror the aftermath of Japan’s last major earthquake in 1995 will be disappointed.
Behind the government statement is the concern that Japan is an export-dependent country which relies on weaker exchange rates particularly in times of low-growth. When a government makes this sort of statement, market appetite for the related currency is understandably dampened.
Will the yen decline? Well, the scale of the disaster is continually being revised up, and in light of this morning’s government statement, the yen could be set to weaken despite a thus far robust post-quake performance. In addition, we see risk appetite increasing over the course of 2011 and anticipate that funds held in yen will be redirected to higher-yielding, riskier currencies.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
The two countries’ approaches are alternative ways of achieving the same basic goals - to give consumers ‘a break’ in amid social upheaval and to provide support to fragile economic growth.
The so-called policy of quantitative easing that Japan has announced this morning invariably has the effect of weakening the economy’s national currency. The US Federal Reserve’s ‘QE II’ program has been responsible for the dollar’s woeful underperformance over the past year or so. Money-printing increases supply, thus weakening the currency as demand eases.
Accordingly, the yen declined against 13 of its 16 major counterparts as markets reacted to the news. However, just as the New Zealand Dollar did in the immediate aftermath of its rate cut last week, the yen has rebounded relatively strongly. There is a sense that New Zealand’s economy may eventually benefit from Christchurch’s disaster, with its construction sector in particular expected to enjoy strong growth. The same was thought of the Japanese construction sector but the apparent devastation suffered in the country’s north-eastern region seems set to provide a genuine setback to the Japanese economy in 2011. The country has suffered major damage to its infrastructure- most notably its roads and highways, factories and nuclear plants.
Fundamentally, we can be pretty confident of one thing- the yen will not strengthen this year. The Japanese government has this morning said as much. It threatened intervention to curb any sudden yen appreciation, asserting that it “will take decisive steps if necessary” (indeed the BOJ acted on their threat in September last year, though the impact was fleeting). So anyone hoping for a yen appreciation to mirror the aftermath of Japan’s last major earthquake in 1995 will be disappointed.
Behind the government statement is the concern that Japan is an export-dependent country which relies on weaker exchange rates particularly in times of low-growth. When a government makes this sort of statement, market appetite for the related currency is understandably dampened.
Will the yen decline? Well, the scale of the disaster is continually being revised up, and in light of this morning’s government statement, the yen could be set to weaken despite a thus far robust post-quake performance. In addition, we see risk appetite increasing over the course of 2011 and anticipate that funds held in yen will be redirected to higher-yielding, riskier currencies.
Richard Driver
Analyst – Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
Tuesday, 23 November 2010
This ain’t no currency war!
There has been a definite shift in sentiment towards ‘risk off’ as news that North and South Korea exchanged artillery fire last night, causing the US dollar, Swiss franc, and Japanese yen to appreciate.
The dollar rose against all of its major counterparts, bar the Swissie, as North Korea fired artillery shells into South Korea near the border. As the South Koreans retaliated, demand for refuge currencies increased and higher yielding assets took a knock. The euro, which is already struggling due to the Irish debt crisis and a renewed bout of political turmoil, has fallen about a cent and a half against the greenback (currently trading at a 7-week low). With further concerns about to rear their head over the state of the Greek economy (the government is threatening to shut down in order to save money), problems in Portugal and a tough global fourth quarter in full swing, we don’t envisage a turnaround in this euro downtrend remain for some time yet.
In addition, expect to see more volatile assets such as the aussie, kiwi and rand remain on the back foot as this period of political and economical uncertainty prevail. The Thanksgiving holiday in the US is yet a further reason for investors to place it safe as they head into a long weekend.
Tom Hampton
Analyst – Caxton FX
The dollar rose against all of its major counterparts, bar the Swissie, as North Korea fired artillery shells into South Korea near the border. As the South Koreans retaliated, demand for refuge currencies increased and higher yielding assets took a knock. The euro, which is already struggling due to the Irish debt crisis and a renewed bout of political turmoil, has fallen about a cent and a half against the greenback (currently trading at a 7-week low). With further concerns about to rear their head over the state of the Greek economy (the government is threatening to shut down in order to save money), problems in Portugal and a tough global fourth quarter in full swing, we don’t envisage a turnaround in this euro downtrend remain for some time yet.
In addition, expect to see more volatile assets such as the aussie, kiwi and rand remain on the back foot as this period of political and economical uncertainty prevail. The Thanksgiving holiday in the US is yet a further reason for investors to place it safe as they head into a long weekend.
Tom Hampton
Analyst – Caxton FX
Friday, 5 November 2010
Dollar steadies
The dollar extended its advance from a nine-month low against the euro as employment data came in almost three times higher than the market has forecast.
The single currency fell early in the session as weaker than expected European retail sales figures and German factory data were published. Further news that the Spanish economy had stagnated re-positioned focus on to the troubled periphery nations and their debt problems.
Midway through the London session, data revealed that October’s US non-farm employment change was up 151,000. The number was a vast improvement on last month’s fall of 41,000 and bettered analysts’ predictions of a lowly 61,000.
Further news of a liquidity problem within a major Spanish bank (not hard to guess which one) has helped depress the euro further.
The greenback is currently trading at $1.4093 and $1.6233 against the euro and the pound respectively.
In other news, the aussie and kiwi dollar look set to notch up their best weekly gains in months and don’t look like stopping. The aussie broke through parity this week to hit a 28 year high (the highest level since the aussie was allowed to float on the open market) of $1.0181 against the US currency.
There is not as much market moving data out next week, however inflation reports from the UK and China could be very important. Especially for our brothers from the antipodes with lofty aspirations. Hopefully England can put one over on them this weekend!
Tom Hampton
Analyst – Caxton FX
The single currency fell early in the session as weaker than expected European retail sales figures and German factory data were published. Further news that the Spanish economy had stagnated re-positioned focus on to the troubled periphery nations and their debt problems.
Midway through the London session, data revealed that October’s US non-farm employment change was up 151,000. The number was a vast improvement on last month’s fall of 41,000 and bettered analysts’ predictions of a lowly 61,000.
Further news of a liquidity problem within a major Spanish bank (not hard to guess which one) has helped depress the euro further.
The greenback is currently trading at $1.4093 and $1.6233 against the euro and the pound respectively.
In other news, the aussie and kiwi dollar look set to notch up their best weekly gains in months and don’t look like stopping. The aussie broke through parity this week to hit a 28 year high (the highest level since the aussie was allowed to float on the open market) of $1.0181 against the US currency.
There is not as much market moving data out next week, however inflation reports from the UK and China could be very important. Especially for our brothers from the antipodes with lofty aspirations. Hopefully England can put one over on them this weekend!
Tom Hampton
Analyst – Caxton FX
Tuesday, 17 August 2010
Sterling down across the board
Sterling is down on the day against all its major counterparts amid speculation on the publication of the MPC meeting minutes tomorrow morning. The CPI figure came in at 3.1%, well above the Bank of England’s target of 2%.
In other news the euro received a boost following solid demand for bond auctions in Ireland and Spain, which helped ease concerns about EU funding. Against the dollar, sterling has managed to claw back early losses to currently sit a third of a cent down due to higher demand for riskier currencies.
Despite today’s setback, we expect to see the UK currency strengthen against the euro over the coming weeks as fears over the EU’s sovereign debt issues return to focus. The regional debt issues should also send the single currency lower against the greenback, leaving sterling/dollar to trade in a relatively tight range between 1.56 and 1.60 in the medium term.
In other news the euro received a boost following solid demand for bond auctions in Ireland and Spain, which helped ease concerns about EU funding. Against the dollar, sterling has managed to claw back early losses to currently sit a third of a cent down due to higher demand for riskier currencies.
Despite today’s setback, we expect to see the UK currency strengthen against the euro over the coming weeks as fears over the EU’s sovereign debt issues return to focus. The regional debt issues should also send the single currency lower against the greenback, leaving sterling/dollar to trade in a relatively tight range between 1.56 and 1.60 in the medium term.
Wednesday, 27 January 2010
In a similar way to the sterling / aussie pairing, the pound crept higher against the kiwi yesterday as investors remained cautious of riskier assets.
- Higher-risk currencies have come under pressure since the announcement from China that they are going to start tightening policy.
- In trading this morning, sterling is continuing to edge higher, with investors cautious ahead of the Reserve Bank of New Zealand's interest rate decision due this evening at 20:00.
Tuesday, 7 July 2009
Sterling falls sharply against kiwi dollar
The pound fell sharply against the New Zealand dollar yesterday, losing 1.38% to finish the day at 2.5572.
- Sterling fell sharply against the kiwi dollar in the early morning yesterday, as investors continued to sell off the British currency on growing risk aversion.
- The pound levelled off in the afternoon, before resuming its fall overnight amid speculation that the Bank of England plans further quantitative easing.
- The kiwi dollar also got a boost this morning from better than expected business confidence figures for the second quarter, suggesting the economy may pull itself out of recession by the end of the year.
Thursday, 16 April 2009
New Zealand undermined by investor caution
The New Zealand dollar lost ground yesterday, as conflicting reports out of the US had investors remain cautious. While there were some positives in the financial sector, economic data has suggested that the world economy may be a long way off from fully recovering. Domestically the economy is still struggling and markets are fully pricing in a further interest rate cut when the Reserve Bank of New Zealand meets at the end of the month.
Friday, 3 April 2009
New Zealand dollar holds steady
The New Zealand dollar remained largely steady yesterday as investors remained wary of the Reserve Bank of New Zealand's warning earlier this week of continuing low interest rates. However, the kiwi did gain some support from a boost in equity markets and an increase in investor risk appetite, after the announcement from the G20 of a massive coordinated stimulus package.
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