New Zealand dollar hits decades-high against British pound

(Newshub.)
(Newshub.)

The New Zealand dollar has traded at a new post-float high against the British pound.

Currency analysts at HiFX say the kiwi rose to 56.75 pence in overnight trading. That was its highest level against the pound since before the kiwi was floated in March 1985.

The dollar had settled at 56.34 pence by 7am on Wednesday.

The pound fell in value after European Union leaders made clear they will not soften their stance when it comes to negotiating Britain's exit from the EU.

The kiwi also traded at around 56.34 pence in early July after the Brexit vote.

But you would have to go back to the mid-1970s to find a time when the New Zealand dollar was stronger than 56.75 pence.

Reserve Bank figures show that the New Zealand dollar spiked to around 59 pence in 1976.

The New Zealand dollar has been going from strength to strength against the pound and other currencies like the US and Australian dollars.

That is a problem for exporters and the Reserve Bank.

This morning Fonterra voiced concern about the strong dollar, after announcing it was lifting its forecast payment to its farmers.

Fonterra Chairman John Wilson said: "While we have seen some improvement in GDT auction prices recently, the high New Zealand Dollar / US dollar exchange rate is offsetting some of these gains."

Despite the strong dollar Fonterra was able to increase its forecast payout by 50 cents to $5.25 per kilogram of milk solids.

It is also forecasting earnings per share range for the current financial year of 50 to 60 cents.

That would mean a total payout available to farmers in the current season of between $5.75 to $5.85, before retentions.

Fonterra holds back some of the dividend so it can reinvest in its business, for example to build new manufacturing plants.

Dairy New Zealand estimates the average breakeven point this season for farmers is $5.05.

There are two big events to look out for tomorrow that could lead to sharp moves in the New Zealand currency.

The first occurs at 6am New Zealand time.

The US Federal Reserve will announce whether it is hiking its key lending rate. There is no chance of a rate cut.

The question is whether the Fed will keep its key lending rate at 0.5 percent, or lift rates for only the second time since the global financial crisis.

The markets have been second-guessing what the Fed might do. It had looked like it was leaning towards lifting rates tomorrow. But some weaker US economic data now makes that seem less likely. Instead it might signal a rate cut is on the cards in December.

Either way the announcement will move the US dollar against other currencies, like the kiwi.

Three hours later New Zealand's Reserve Bank will announce whether it is cutting the Official Cash Rate from 2 percent.

The markets are picking that the RBNZ will keep rates on hold and signal that it will cut the OCR at its next meeting in November.

What tomorrow illustrates is that the New Zealand dollar is impacted not just by events here in New Zealand, but also overseas.

There is another event to look out for.

Today Japan's central bank will tell the markets whether it plans to push its key lending rate further into negative territory.

Its key lending rate is already sitting at -0.1 percent.

The Bank of Japan could opt to keep rates on hold. Instead it could announce it is stepping up its efforts to inject more cash into the economy by buying government bonds.

The BOJ's efforts to lower the Yen have proved challenging. On one occasion it cut rates only to see the Yen rise in value.

It shows the challenges for central bankers when they try to influence the currency markets. The problem they have is that everyone else is trying to do it as well.

Newshub.

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