Foreign Currency Market Update – GBP / NZD Update
Last week saw the Pound Sterling to New Zealand Dollar (GBP/NZD) exchange rate reach 2.1549, its highest level since March 2011, as concerns over the strength of the Trans Tasman economy weighed heavily upon the ‘Kiwi’. The main driver for the currency’s weakness was last Thursday’s announcement by dairy company Fonterra.
As dairy exports make up the bulk of the New Zealand economy, any negative forecasts have a detrimental impact upon the currency. The company lowered its forecast payout for the nation’s farmers, a move that spooked investors as it could plunge New Zealand into a $13 billion economic black hole.
Fonterra said that its next season forecast is less than analysts had been expecting and will be below the break-even point for many farmers. The previous season’s payout had already been at an eight-year low of $4.50 per kilogram for milk solids, now it is even lower at $4.40. Economists had been expecting a payout rate of $5.50.
‘Global commodity prices have not increased and markets are oversupplied with dairy goods. This is a tough season and we will continue to keep our farmers informed as the season draws to a close given the current volatility,’ said Fonterra Chairman John Wilson.
Today, the New Zealand Dollar recovered some ground against the Pound Sterling and US Dollar (USD) as economic data out of China, (the nation’s second largest trading partner) showed signs of improvement. The official Purchasing Managers Index (PMI), which focuses on large companies, showed that factory activity in China improved slightly in May. The PMI rose from the 50.1 recorded in April to 50.2, to match economist forecasts. The separate final HSBC PMI, which focuses on smaller businesses, stayed in contraction territory for a third straight month at 49.2 but beat the 49.1 figure recorded in April.
‘The improvement of both PMIs is due to the recent pro-growth policies launched by Chinese authorities. Along with the reserve requirement ratio (RRR) and interest rate cuts, the government has rolled out more supportive fiscal policies,’ said analysts.
The GBP/NZD exchange rate will experience volatility over the remainder of the week due to the wealth of economic data releases due for publication. Data out of the US will have a particular impact on the ‘Kiwi’ and the Pound will be influenced by a flurry of PMI reports and Thursday’s Bank of England (BoE) interest rate decision.
Heads Up
Summary of major upcoming data releases that we think may move the market.