Australian and New Zealand Dollars Plummet Against Pound Sterling
The pound sterling has advanced notably against the New Zealand and Australian dollars in the mid-June trading sessions - where will the move end?
The mid-month advances by the UK currency reinforce a trend that has been in place for a year now - one in which GBPAUD and GBPNZD are advancing well beyond the 2.00 level.
Indeed, the pound to Australian dollar exchange rate (GBPAUD) is at its best level since August 2009. At the time of writing the conversion is at 2.0449.
Those looking to make international payments to New Zealand will be doing so with a pound to NZ dollar exchange rate (GBPNZD) that is at 2.2962 - the best rate of exchange since mid 2009.
Those looking to make payments with either currency should consider locking in current rates while holding the option of exchanging at a higher rate should it be hit. Find out more about how this works.
Those looking to do spot transactions should do so remembering your bank will offer a rate with a hefty spread subtracted from it. An independent currency provider will do so closer to the market, thereby delivering up to 5% more FX in some instances, learn more.
More Bad News for the Kiwi
The weakness in the NZD complex is eye-opening - more fuel was added to the sell-off on Thursday the 18th when first quarter GDP was released.
The headline figure showed growth came in at an anaemic 0.2% on a quarterly basis - well below analyst forecasts for 0.6%. Annualised growth is now standing at 2.6% when markets had priced in a higher 3%.
This confirms that the economy could be underperforming RBNZ expectations which tells us that the reserve bank could initiate another cut to interest rates this year.
The simple rule applies - in FX falling interest rates result in weaker currencies.
Why is the Pound Doing so Well?
The GBP is driving the story in mid-month trade after some favourable data was released by the UK’s official statistics body.
The earnings power of the UK workforce has improved substantially. The Average Earnings Index +Bonus (Apr) jumped 2.7%, up from 2.3% in the previous month. Compare this to the expectations for a reading of 2.1% and we can see why the currency markets are playing catch-up with the pound.
The Bank of England has long pointed to wage levels as being a key factor behind when they raise interest rates.
With wages rising at this pace we have the sense that the Bank will have to bring forward their first hike.
The lot of the UK worker is certainly improving as wages are now outstripping inflation by quite a margin, latest inflation data shows price growth of only 0.1%.
For much of the recession and subsequent recovery the Bank of England has pointed out that wage growth has been subdued - something that suggests the economy is not running at full capacity.
But now the slack is being pulled in significantly and we get the sense the Bank is watching.
MPC Minutes Released: The Bank Could Soon Act
Indeed, at the latest MPC meeting, the minutes of which were released on the same day as the wage data, it was shown that two members of the Committee are leaning to raising rates.
The minutes read:
“Committee members agreed that it was appropriate to leave the stance of monetary policy unchanged at this meeting. For two members, the immediate policy decision remained finely balanced between voting to hold or raise Bank Rate.“
Alex Lydall, senior trader at Foenix Partners, says he thinks Committee members will soon start backing an interest rate rise sooner rather than later:
“With deflationary fears subsiding on yesterday’s CPI print – now back into positive territory at 0.1% (y/y) – MPC doves could be in minority sooner than expected despite the unanimous MPC vote today.
“The committee has already highlighted in prior meetings that opinions differ on wage growth and productivity, and the two ‘finely balanced’ members, McCafferty and Weale, could be ‘off the fence’ in coming months and voting in favour of a hike.
“With Carney noting projections for inflation will rise more sharply than previously forecast, the step back into positive territory could deem a significant start to the balance in power shifting quickly towards the hawkish members.”
With the BoE looking to raise rates and New Zealand cutting rates we continue to believe that the GBP-NZD will move higher back towards historical levels.
The outlook for the pound against the Australian dollar also looks firm - particularly with the view that the AUD will lose ground over coming months as the Australian economy slows down.
