The Australian and New Zealand dollar have been buoyed against most crosses recently in what has been a war of the lesser-of-evils.
Solid trade balance data was from China at the beginning of the week showing strong export levels and lower imports was the first positive signs for the Asian focussed export markets. This was then followed by strong GDP data from Japan with annualised first quarter growth of 6.7%. Then today what really buoyed the Kiwi was an increase in base interest rates from 3% to 3.25%.
The international market is still starved of interest-bearing, high-liquidity investment opportunities. Countries, namely China and Japan, still have trillions of foreign currency reserves that need to be invested abroad.
Last week we saw the European Central Bank actually moved deposit facilities to negative interest rates, meaning you pay to have your funds held in their deposit facilities. There has been mention of large amounts of capital, especially from Japanese investors, moving from Europe to Australia and no doubt New Zealand following today’s rate move. The price action on the charts would also suggest as much.
Last night we did see more positive data from the UK on the employment front with the unemployment rate dropping to 6.6%, a 5-year low. However, the BOE has not given an indication it will raise domestic rates in the near-term. It still has Quantitative Easing in the market of 375B a month which it would start to scale back before raising rates and has also been proactive in using other tools to slow the heated housing market. Namely, encouraging lenders to tighten their credit criteria.
Over the last few years the major global capital flows have been chasing whatever yield is available in high-liquidity-markets and it appears that this theme is still dominant. Positive interest rate differentials should continue to support currencies and the speculators will focus on the policies of central banks with the hope rates will rise.
