With much of the focus being solely around Brexit in recent weeks I thought it might be an opportune time to focus on a number of other currencies that we commonly assist our regular readers with, these being the ZAR, AUD and NZD.
Of late there has been a significant swing in fortunes for what we would classify as higher risk currencies. Under this banner you would include the South African Rand (ZAR) Australian Dollar (AUD) and New Zealand Dollar (NZD). These currencies are vulnerable to significant market movement due to their higher yields. Due to the interest rate being significantly higher in these respective currencies investors, hedge funds and banks alike will often move large deposits of currencies into these currencies to take advantage of the higher return they offer. This is commonly knows as a ‘carry trade’.
What is the recent trend?
During times of market confidence and higher risk appetite you will often see demand for these currencies significantly increase, something we were to see earlier this year. However with on going Brexit concerns, a long with market jitters caused by the situation in Turkey, in recent weeks we have seen a large reversal of these trades. As a result the currencies have devalued significantly. To highlight this the ZAR exchange rates fell by over 14% against the pound in just over 4 weeks. A similar trend, although not as significant, was seen for the AUD and NZD falling 5.25% and 4.5% respectively.
Will this trend last?
As with any currency it is impossible to fully predict what will happen but I do feel the bubble for ZAR, AUD and NZD buyers is about to burst. We have already seen the Rand recover just shy of 2% and I would expect GBP/ZAR to trend back into the low 18s. As for the Australian and New Zealand Dollar, I also feel a correction is likely to be seen with GBP/AUD falling back towards 1.75 and GBP/NZD 1.90. For this reason if you are buying these currencies I would be looking at my options whilst the prices are still relatively strong.
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