Foreign Currency Market Update – GBP / NZD Update
In response to dovish comments from Reserve Bank of New Zealand (RBNZ) Assistant Governor John McDermott, the New Zealand Dollar softened considerably versus many of its most traded currency competitors last week. Tepid data out of China and downbeat market sentiment driven by the Eurozone geopolitical situation oiled the ‘Kiwi’ (NZD) slide.
The resultant move saw the New Zealand Dollar drop from a high of 0.5178 to 0.4994 against the Pound Sterling.
Several major global central banks have been forced to loosen monetary policy over the past few months in order to combat inflationary pressures, the RBNZ among them. This has resulted in futures traders delaying bets as to the timing of a new rate hike cycle being initiated by the US and the UK. Meanwhile, the recent easing of global oil prices has failed to subdue the pace of price rises in New Zealand.
In response to domestic inflation issues, Reserve Bank Assistant Governor John McDermott made some particularly dovish comments and suggested that the institution will keep monetary policy stimulatory. The outlook for New Zealand inflation is subdued and ‘suggests that monetary policy should remain stimulatory for a prolonged period,’ John McDermott said in a speech Thursday. ‘Evidence of weakening demand and domestic inflationary pressures would prompt us to consider lowering interest rates.’
‘At present, the bank is not considering any increase in interest rates,’ McDermott added. ‘Before considering any tightening in monetary policy we would need to be confident that increased capacity utilization and labour market tightness was generating, or about to generate, a substantial increase in inflation.’
In addition to the downtrend caused by potential benchmark rate cuts, the ‘Kiwi’ weakened as a result of dampened global market sentiment. With Greece’s leaders failing to secure the relief funds it so desperately needs at last Friday’s Eurogroup, the increased likelihood that the Hellenic state will default on loan repayments has heightened considerably. With little known as to the full impact this would have on the wider currency market, trader risk-appetite has diminished significantly. As a risk-correlated currency, subdued market sentiment results in soft demand for the high-yielding asset.
Another factor aiding the ‘Kiwi’ depreciation was disappointing data out of China. Of particular detriment to the Oceanic currency was China’s poor manufacturing output. Given the intimate trade relationship between New Zealand and China, rocky data from the Far East nation has a marked impact on the New Zealand Dollar.
One saving grace for the ‘Kiwi’, however, has been a weaker US Dollar which slowed the New Zealand Dollar’s decline.
As we look ahead, the most significant economic event pertaining to the New Zealand Dollar will be the RBNZ Rate Decision. Given that the comments made by the Assistant Governor suggested the institution will keep policy stimulatory, some expect the bank to cut the cash rate. However, with important labour market data and inflation data due after the decision, policy makers may opt to wait for the following policy meeting before slashing rates.
Domestic Trade Balance data may also be of interest to see whether the recent disappointing data out of China has had a detrimental effect on New Zealand’s trade surplus. Business Confidence data could also be influential on ‘Kiwi’ movement.
Heads Up
Summary of major upcoming data releases that we think may move the market.