Foreign Currency Market Update – GBP / NZD Update
While the ‘Kiwi’ has recently been buffeted by negative headwinds and global slowdown concerns, the GBP/NZD exchange rate suffered a significantly bearish run throughout the last week due to a prolonged weakness in Pound sentiment. After Tuesday saw the UK Public Sector Net Borrowing figure rise above forecast, to 11.3 billion Pounds against an expected 8.8 billion, the odds of a near-term Bank of England (BoE) interest rate rise appeared to be substantially diminished, to the disappointment of rate hawks. With members of the Monetary Policy Committee (MPC) also suggesting that a hike could be off the cards until the second or third quarters of 2016 the appeal of Sterling remained decidedly limited ahead of the weekend.
Elsewhere, New Zealand’s Trade Balance for August proved worse than anticipated, showing a notable increase in deficit as opposed to the forecast improvement, to cast more dovish shadow over the South Pacific currency. In spite of both Exports and Imports within the same month having printed at stronger levels than investors had expected, any buoyancy for the ‘Kiwi’ was undermined by the release of the latest Chinese Manufacturing PMI. This data did not bode well for the prospects of the export-reliant New Zealand Dollar, as this revealed that the manufacturing sector of the world’s second largest economy had slowed in September to its lowest level since 2009.
However, the ‘Kiwi’ produced a strong rally on Thursday after dairy market leader Fonterrra raised the level of financial support it would be offering to its farmers, from $3.85 to $4.60 per kilogram of milk solids produced. Given the predominant role of the dairy trade within the New Zealand economy this reassurance for struggling producers helped to shore up the local currency, as the threat of market contractions was at least temporarily held off. As global supplies continue to outpace demand, though, the longer-term outlook of the domestic economy remains muted.
With the US Federal Reserve having begun to talk up the odds of an interest rate hike coming before the end of the year, at either the October or December meetings of policymakers, the prospect of a stronger ‘Greenback’ has also begun to weigh up the commodity-correlated currencies. A rising ‘Buck’ could force the Reserve Bank of New Zealand (RBNZ) to slash interest rates in order to keep the ‘Kiwi’ competitive, something which has naturally been concerning investors.
Over the coming week there are no major economic data releases due for publication from New Zealand, leaving the ‘Kiwi’ to be driven primarily by foreign developments. Further hawkish signals from the Fed, or US data in general, are likely to hold down the South Pacific currency, as will any additional shortfalls on Chinese figures. As such the GBP/NZD exchange rate has the potential to recover some of its lost ground over the coming days, particularly if fresh UK data such as the Manufacturing and Construction PMIs prove supportive.
Heads Up
Summary of major upcoming data releases that we think may move the market.