Emergency BoE Rate Cut Leaves the Pound Sterling (GBP/NZD) Exchange Rate Lower
UPDATE: The Pound Sterling New Zealand Dollar (GBP/NZD) exchange rate slumped this afternoon, leaving the pairing trading at around NZ$2.0174.
The Pound slumped following the announcement of this month’s second emergency rate cut from the Bank of England (BoE).
The bank cut rates to a record low 0.1% due to the growing economic risks of the coronavirus pandemic, which is currently spreading across the world.
The BoE also announced plans to buy more UK bonds in response to the Pound’s sell-off over the last day.
In a statement, the Monetary Policy Committee said:
‘Over recent days, and in common with a number of other advanced economy bond markets, conditions in the UK gilt market have deteriorated as investors have sought shorter-dated instruments that are closer substitutes for highly liquid central bank reserves.
‘As a consequence, UK and global financial conditions have tightened.’
Pound Sterling New Zealand Dollar (GBP/NZD) Exchange Rate Muted as Traders Flock to the US Dollar
The Pound Sterling New Zealand Dollar (GBP/NZD) exchange rate remained largely flat this morning as the coronavirus pandemic continued to cause chaos. This left the pairing trading at around NZ$2.0295.
The New Zealand Dollar suffered against a handful of currencies, losing as much as 5 cents against the US Dollar (USD) as investors flocked to more traditional safe-haven currencies.
The sell-off and traders flocking to the US Dollar left the ‘Kiwi’ at the lowest levels last seen during the depths of the global financial crisis.
The rescue package announced by the Reserve Bank of Australia (RBA) did little to boost the Australian Dollar (AUD) or NZD.
The worsening Covid-19 pandemic severely dampened risk sentiment. Commenting on this, Hamish Pepper, fixed-income and currency strategist at Harbour Asset Management said:
‘We’ve moved away from some of those dynamics that we might’ve talked about that were supporting the ‘Kiwi’ Dollar, such as relative interest rates and the terms of trade.
‘New Zealand has always had some reliance on global funding and I guess, in times of stress, those who provide funding to New Zealand will demand greater reward for that and a lower currency is one way of doing that.’
However, Sterling remained on the back foot today, which left the pairing muted.
Yesterday: Sterling (GBP) Suffers Significant Losses
The Pound remained under pressure on Thursday after slumping to the lowest level since 1985 against the US Dollar (USD).
Added to this, against the Euro (EUR), Sterling plummeted to the lowest level in over a decade.
Commenting on the recent movement of Pound exchange rates, Ulrich Leuchtmann, head of FX and commodity research at Commerzbank said:
‘Sterling is in a very difficult situation – you don’t want any kind of extra risk in your portfolio.
‘You might be positive about [Brexit] or not, but you knew you were taking additional risk, which is not required at the moment so there is a big motivation for dumping Sterling at the moment.’
Despite the government’s announcement of a £330 billion lifeline of loan guarantees and added tax cuts, traders continued to move away from GBP.
Sterling struggled despite new Bank of England (BoE) Governor Andrew Bailey saying that policymakers were considering cash handouts to citizens to help keep the economy moving.
Traders focused on the coronavirus pandemic as confirmed cases in the UK jumped by 48% from the previous day. This also caused the British government to announce the closure of all schools from Friday.
The Pound was able to remain flat against the risk-sensitive New Zealand Dollar, as coronavirus panic saw traders move away from both currencies.
Pound New Zealand Dollar Outlook: Coronavirus Pandemic in Focus
Looking ahead, the coronavirus pandemic is likely to play a major role in the movements of both the Pound (GBP) and New Zealand Dollar (NZD).
Risk appetite is likely to remain low which will leave the risk-sensitive ‘Kiwi’ under pressure.
However, with the threat of Brexit weighing on the British currency, traders could continue to move away from GBP. This could leave the Pound New Zealand Dollar (GBP/NZD) exchange rate largely flat.