Tuesday, August 26, 2014

New Zealand dollar gains on Milk Powder news | Sterling and Scottish secession revisited

Late last July we highlighted the importance of dairy products to the New Zealand economy, and the part played in this by one particular concern, Fonterra Cooperative Group, which also happens to be New Zealand’s largest company.

The Kiwi dollar is enjoying a decent surge this AM after two announcements from Fonterra overnight in GMT terms: The Co-Op has made a tie-up with a Chinese company to manufacture milk based products; and it has announced that there will not be a further reduction, at least for the present, in the payment estimate for milk solids to farmer producers, as had been feared by the market due to weak auction results recently.

It will be remembered that a reduction in this price was a major factor in July in the weakness of the New Zealand currency unit.

It remains to be seen if this boost for the Kiwi will be sustained, especially in light of the known desire of the Reserve Bank of New Zealand (RBNZ) for a weaker currency, and their stated willingness to intervene in the market place to bring this about.

Sterling and Scottish secession

Yesterday’s comments here on the uncertainty surrounding Sterling due to the upcoming referendum on Scottish independence resulted in some reflection about the likely repercussions of a vote to split that country off from Great Britain.

The first thing that comes to mind is the loss of oil revenues to the British exchequer. This would be a major blow for the British pound, and would be the factor that would play most solidly on the minds of currency traders initially.

They might then reflect on the likelihood that most financial services institutions north of the border, along with a sizeable number of Foreign Direct Investment (FDI) companies, would move their operations into England and Wales, which would tend to offset the loss of oil revenue.

So the most likely outcome from our point of view would probably be very high volatility in all those pairs that contain GBP. No doubt other, as yet unthought-of scenarios would also play out.

No wonder the Forex market at large is being cautious right now and allowing cable to drift downward in the face of all other fundamentals that pertain to the British economy. The polls seem to be favouring a “No” vote at present but voters everywhere have shown themselves to be capricious in the extreme when it comes to referendums such as this.

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