Opinion: British pound slumps overnight on fears of hung parliament

GBP/USD slumped nearly 2c, dragging EUR/USD below 1.3500 and NZD/USD below 0.6950. With GBP in retreat, NZD/GBP flirted with post-float highs close to 0.4700. However, lows in NZD/USD around 0.6950 didn't last for long. Appetite for high-yielding currencies like the NZD soon recovered following another night of solid gains in equity markets. In addition, a hawkish article from RBA "˜watcher' Terry McCrann (suggesting the RBA will hike rates 25bps at today's meeting) saw the AUD/USD bounce off its overnight lows, sending NZD/USD back towards 0.7000. Confirmation NZ's commodity export prices continue to trend higher also supported the NZD last night. Yesterday's ANZ commodity price index showed world prices rose 3.8% in February, to be up 49% on an annual basis. Today's RBA interest rate decision (4:30pm NZT) has the potential to spur volatility in the NZD, given markets are currently 60% priced for a 25bps rate hike. If the RBA does hike, expect a knee-jerk surge in the NZD/USD and further weakness in NZD/AUD. Support on NZD/AUD is expected towards the 2008 low of 0.7710. The USD strengthened against most of the major currencies overnight. Once again, GBP stole the limelight last night. A sharp weakening in GBP/USD dragged most of the major currencies lower throughout the night. UK election polls indicate a growing chance the upcoming election may result in a hung parliament, which would not bode well for the UK's AAA credit rating. M&A activity also provided headwinds for GBP. Prudential announced it will buy AIG's Asian insurance business for US$35.5b. Rumours the deal involves selling US$25b worth of GBP saw GBP/USD slump nearly 2c to 10-month lows around 1.4800, before rebounding slightly. This was despite a marginally better than expected read on the UK's manufacturing sector from the February UK PMI. The weaker GBP paved the way for more broad-based gains in the USD. EUR/USD traded heavily, falling from 1.3650 back towards 1.3500 and AUD was also dragged lower initially. Any rumours that Greece was about to receive a handout from other EU counties were nipped in the bud last night. German Prime Minister Merkel denied claims Germany was about to purchase Greek bonds. Still, investors were reassured by a renewed commitment from the Greek PM to meet Greece's budget targets. Greek 5-year CDS spreads fell 35bps to 365bps, underpinning a second straight day of gains on European stock markets. The DAX jumped 2%, while the FTSE rose 1%. Confirmation the global manufacturing sector continues to recover helped assuage investor nerves about the global outlook. The EU PMI manufacturing index nudged up to 54.2 in February (54.1 expected), and the US ISM manufacturing index dipped only slightly (56.5 vs. 57.9 expected). Consistent with the renewed optimism about the global recovery, commodity-linked currencies managed to buck the firmer USD trend last night. AUD/USD found support from solid gains in metals prices and media reports suggesting a RBA rate hike today is all but assured. Meanwhile, USD/CAD fell to almost 1.0420 after annualised Q4 Canadian GDP growth hit the highest rate since 2002 (5.0% vs. 4.2% expected). Looking ahead, central bank policy announcements will occupy markets' focus this week. No change is expected from either the Bank of England or the ECB (both Thursday), but today's RBA rate decision looks to be less clear-cut. Current market pricing implies a 60% chance of a 25bps rate hike. * Mike Jones is a BNZ Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.