Foreign Currency Market Update – GBP / NZD Update
Tuesday’s session brought pronounced fluctuations for the Pound New Zealand Dollar exchange rate. The pair touched a fresh 4-month peak of 2.0937 during the Asian session before pulling back to trade down into the lower part of the 2.0400s later the same day.
The sharp bout of selling pressure on the Kiwi during the early hours of Tuesday morning was driven by the Reserve Bank of Australia’s unexpected announcement that it was cutting its key interest rate to a record low level of 2.25%. The New Zealand Dollar is often lumped together with the Australian and Canadian Dollars in a group referred to as the ‘Commodity Dollars’. The RBA’s decision to ease its monetary policy leaves the Reserve Bank of New Zealand (RBNZ) as the odd-one-out of the three Commodity Dollar Central Banks, following the Bank of Canada’s surprise choice to trim its key lending rate last month.
The previous week’s shift to a neutral policy stance, (hinting that a rate cut is now as likely as any increase), from the RBNZ was repeated late on Tuesday by the Bank’s Governor Graeme Wheeler. However, the RBNZ Chief’s comments warning of the dangers of a continuation of the over-heating of prices in the Auckland and Christchurch housing markets would appear to make a rate cut less viable, as would the near-term movement in global oil prices, which have seen the price of a barrel of Brent Crude climb by over 20% since the final week of January. Admittedly, oil is rebounding from a very low level, but such an increase in the price of the key commodity will still fuel global inflationary pressures down the line.
If the RBNZ does resist the temptation to jump on the rate-cutting bank waggon, then the New Zealand unit may firm up against the Pound before Summer arrives, as the Kiwi’s relative yield advantage grows. In such a circumstance, renewed support for the New Zealand Dollar is likely to be accentuated by any loosening, or hints at a future loosening, of policy from other major central banks across the globe. Wednesday’s announcement from the People’s Bank of China (PBoC) that it is dropping the percentage of liquid assets which it requires its nation’s retail banks to be holding from 20.0% down to 19.5% favoured the Kiwi and any further reductions in the reserve requirement ratio from the PBoC will have a similar effect.
On the flipside, any increase in rates from a leading central bank would hurt the export-led Kiwi. Friday’s data from the US, which revealed that over 200,000 new jobs had been generated in the American economy for the eleventh month on the trot, caused investors to price in a higher percentage chance that the Federal Reserve will be hiking its headline lending rate this year. Any further evidence that the Fed is set to tighten policy could send GBP NZD up through the 2.1058 which it reached last September. Such a move would bring the highest trading rate for the pair for almost four years. A toughening of the European Central Bank’s stance towards Greece’s request to cancel half of its debt burden would be likely to have a similar effect on GBP NZD.
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