NZ dollar falls to 3-week low against British pound as BOE seen eyeing rate rises

Thursday 22nd May 2014

The New Zealand dollar fell to a three-week low against the British pound on the expectation a revival in the British economy may prompt the Bank of England to raise interest rates earlier than previously forecast.

The kiwi touched 50.57 British pence early this morning and was trading at 50.65 pence at 8am from 50.79 pence at 5pm yesterday. The local currency was little changed at 85.61 US cents from 85.55 cents yesterday after minutes from the last Federal Reserve meeting showed policy makers expect continued stimulus to push unemployment lower won't hike inflation.

The British pound rose to a 5-1/2 year high against a basket of currencies after a report showed UK retail sales rose more than expected last month to the highest since 2004, signalling growth in the UK economy continues to outpace all other nations in the group of seven advanced economies. Sterling gained an additional push from the Bank of England minutes from its last meeting where members agreed they needed to see more evidence of "slack reducing" before raising the benchmark rate from a record low 0.5 percent, however the decision on whether to increase interest rates for the first time since 2007 was now "more balanced" for some.

"The market reacted with particular vigour to the suggestion in the minutes that the more gradual the rise in rates the earlier BoE need to start the process in order to rebalance the rates," Boris Schlossberg, managing director of foreign exchange strategy at BK Asset Management in New York, said in a note. "This indicates that at least some of the Monetary Policy Committee members are considering the possibility of a rate hike sooner than the expected first quarter of 2015."

Tonight, the UK releases its preliminary reading of first quarter gross domestic product.

The kiwi is now at a critical support level against the British pound that held in late April, and a break below this would open the way for a return to the kiwi trading at 50 pence, Kymberly Martin, senior market strategist at Bank of New Zealand, said in a note.

In New Zealand today, traders will be eyeing the latest ANZ consumer confidence survey and the Reserve Bank's latest quarterly survey of inflation expectations.

Also on the radar is the release of the latest HSBC China purchasing manager's index. The PMI is expected to remain in contraction at 48.3 and a weaker reading could weigh on the New Zealand and Australian currencies as China is the largest trading partner of both nations.

The New Zealand dollar gained to 62.55 euro cents from 62.41 cents yesterday after a report showed May consumer confidence in the Eurozone reached its highest level since October 2007.

The kiwi climbed to 86.82 yen from 86.53 yen yesterday after the Bank of Japan refrained from announcing any further stimulus at its meeting yesterday.

The local currency was unchanged at 92.61 Australian cents. The trade-weighted index edged up to 79.81 from 79.71 yesterday.

BusinessDesk.co.nz

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