GBP rebounds, RBNZ warns about NZD strength

The Fed unsurprisingly left policy on hold while lowering projections for unemployment and raising forecasts for higher near term inflation. The economy is still expected to grow at a ‘moderate’ pace in coming quarters, with the majority of FOMC members anticipating the first tightening in 2014 or beyond. The one sop to markets was the fact that the Fed is prepared to do more in terms of policy enhancement if needed. This helped to buoy risk assets overnight leaving the USD on the back foot. Data releases are thin on the ground today leaving markets to consolidate gains in a relatively ‘risk on’ environment.

GBP came tumbling down from its highs following news that the UK economy entered a technical recession after GDP surprisingly contracted by 0.2% in Q1. However, the drop was short lived, with GBP/USD recovering from its losses, helped by a stellar reading for UK Nationwide consumer confidence in March. Notably however, Nationwide cautioned that the bounce in confidence could be short lived and we would be cautious of reading too much into the data. GBP gains against the EUR look as though they have reached its limit, and our models suggest that EUR/GBP is trading close to short term ‘fair value’.

There was no change in policy from the RBNZ as expected, with policy rates on hold at 2.5%. However, governor Bollard did attempt to talk the NZD lower while highlighting concerns about the global outlook. Concerns about kiwi strength will raise the spectre of FX intervention although it may also mean a delay in rate hikes. The statement was relatively more positive on the domestic outlook. Although rates are ‘appropriate’ according to the RBNZ we still think there is a good chance of a rate hike in Q3. The NZD ignored Bollard’s comments, firming on the back of improved risk appetite. We still see downside risks to the currency, especially as the current risk environment remains fragile.

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