Good Morning. I've recieved a fair few questions recently regarding the antipodean currencies, namely the Australian Dollar (AUD ro Aussie Dollar) and New Zealand Dollar (NZD or Kiwi Dollar).
So, after a quick review of yesterdays trading, today we will take a closer look at what the future may hold for these currencies.
Yesterdays Trading
Sterling fell against the dollar and euro yesterday after a sharper than forecast fall in British retail sales highlighted a contracting economy. Sterling did breifly gain however, getting to $1.47 breifly after U.S. Treasury Secretary Timothy Geithner said he was open to a Chinese proposal to enlarge the use of International Monetary Fund Special Drawing Rights.
He added however that the dollar was likely to remain the world's currency for a long time.
Analysts said the market had been knocked by Bank of England Governor Mervyn King's comments on Tuesday that the central bank may not need to buy as many gilts as planned if its 75 billion pound 'quantitative easing' programme enjoys early success. Expect the pound to remain under pressure for some time.
Todays Data
For the UK we have monthly and yearly retail sales at 09:30 that's likely to cause volatility if the figures are different than forecast. For the US we have Jobless data, and some important GDP figures. New Zealand will also release GDP figures and Trade Balance Data this evening.
Australian Dollar AUD (Aussie)
Here we see GBPAUD over the last 12 months. You can see the big rise last autumn. This was when we had a very strange day in the markets where the world slashed interest rates in a co-ordinated move. What often causes volatility in GBPAUD is something called 'Carry Trading'. This is where an investor would have borrowed somewhere like Switzerland or Japan where rates are very low, and then invest the funds in AUD or NZD where returns are higher.
When we saw rates slashed all over the world, the reversal of these carry trades caused a flood of AUD and NZD on the markets. This causes the value to fall and exchange rates to rise. With rates around the world very different now than previously, this happens less. The decline last year can be atributed to the fall in the value of the pound.
Another impact for AUD is the droughts in recent years. Farming is a big part of the economy and the droughts of recent years has affected exports. This is one of the most volatile currencies traded in the world, and we often see bug daily swings.
I would expect the rate to settle around the 2.20 /2.30 level, but we may not see this until 2010. For this year the rate may well continue to drop as Sterling remains under pressure.
New Zealand Dollar (Kiwi)
The volatility in this curreny pair is plain to see. The movements here are again caused by big interest rate changes, the unwinding of carry trades, and risk appetite of investors. New Zealand rates are 3.5%, whereas last year rates were very high indeed.
Again a very volatile currency, and impossible to predict. This currency moves much more than other currency due to carry trading. You can see rates climb at the start of the year - they cut rates and there were fears of big recession. People then moved their funds to the percieved safer currency of the USD, weakening the NZD and causing rates to climb.
You can see the opposite happening over the last month, as fears in the US cause these trades to be reversed. You still get a better return on NZD than USD.
Summary
The Kiwi dollar and the Aussie dollar have been attracting investors because of its higher interest rates and also because governments on the other side of the globe are not exploring "quantitative easing" like the UK and US.
Although investors see Quantitatvie Easing as positive for markets they do not see it as helpful to the currencies involved, hence the decline in the value of the pound of late.
Last week's news of more bail-out activity, particularly in the United States, spurred rallies in risk-sensitive currencies like the AUD and the NZD, and as long as investors remain relaxed about the global outlook the antipodean currencies could see further gains.
The risk, as ever, is the unwinding of carry trades, which can cause very big swings as you can see from the chart. In a matter of mintes rates can move by 2 or 3 % sometimes.
If you require either of these currencies, its impossible to predict if rates will recover or continue to decline.
What would I do?
If I had a requirement for either of these currencies, I would hedge my bets. Buy half of what I require now, and take a gamble on the other half. This way, regardless of which way rates move I'm protected. If rates go up, then great I'll buy the rest. If rates go down, then I would have placed a Stop Loss order to make sure I dont lose more than I can afford to.
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Labels: AUD, Exchange Rate Forecast, NZD, Sterling Outlook
