Foreign Currency Market Update – GBP / NZD Update
Demand for the ‘Kiwi’ slumped decidedly on Tuesday as a result of the latest GlobalDairyTrade auction, which saw dairy prices unexpectedly fall by 3.1%. As the first such drop in prices since the commodity began to rally in August this rather weakened investor confidence in the New Zealand economy, raising concerns that a weakening dairy sector could prompt the Reserve Bank of New Zealand (RBNZ) to slash interest rates before the end of the year. This result was all the more dovish for the South Pacific currency as it followed the news that China’s GDP had fallen to its lowest level since 2009 in the third quarter of the year, prompting fresh slowdown fears.
New Zealand Credit Card Spending was shown to have fallen in September, slumping from 10.4% to 7.3% on the month, suggesting that domestic consumer confidence has continued to falter amid negative global headwinds. This helped to boost the GBP/NZD exchange rate to a fortnightly high of 2.3019 as the UK Public Sector Net Borrowing figure printed at a lower level than forecast. Bettering estimates, government borrowing was shown to have narrowed by more than expected in September, a strong reassurance after the unexpectedly high figure for August.
The GBP/NZD exchange rate was pushed into a severe slump on Friday after the People’s Bank of China (PBoC) made a surprise announcement that domestic interest rates would be cut by a further 0.25 percentage points. Markets initially reacted well to the news, with a sharp spike in risk appetite pushing the pairing to a four month low of 2.2456 before investors became a little more sceptical that the latest easing measure will be enough to prevent the Chinese economy suffering a hard landing. As such the ‘Kiwi’ was soon prompted to cede back many of its gains ahead of the weekend.
Although concerns have persisted on Monday that other central banks will be forced to adopt more dovish attitudes after the PBoC’s announcement, the New Zealand Dollar has returned to an uptrend as the odds of an imminent Fed interest rate rise have diminished. The latest US data has failed to encourage more positive speculation, with New Home Sales showing a severe contraction in September.
Later on Monday evening the New Zealand Trade Balance could offer further support to the ‘Kiwi’ if it clocks in as expected, with the deficit forecast to narrow from -1035 million to -825 million New Zealand Dollars. Also of note in the coming week will be Wednesday’s RBNZ Rate Decision, although traders do not expect that policymakers will opt to reduce interest rates at this meeting. Should any comments from Governor Graeme Wheeler prove more dovish, however, this could put an end to the current bullish run of the ‘Kiwi’.
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