Foreign Currency Market Update – GBP / NZD Update
Investors were not given much incentive to buy into the New Zealand Dollar last week as domestic data proved decidedly bearish. The third quarter Unemployment Rate inched higher from 5.9% to 6.0%, a result that traders had anticipated but which nevertheless provided another indication that the recovery of the New Zealand economy remains more fraught than might have been hoped. As both the quarterly Employment Change and Participation Rate also showed weakness this did not offer any particular support for the South Pacific currency.
The fortnightly GlobalDairyTrade auction also proved disappointing for the ‘Kiwi’ as the price of milk solids retreated for the second consecutive session. Highlighting the underlying weakness of the global dairy industry, this result dampened the longer-term prospects of domestic producers as further contractions appeared imminent. With farmers increasingly dependent upon support from market-leader Fonterra, this persistent weakening in values saw the appeal of the commodity-correlated currency diminish further.
Meanwhile, the Pound was buoyed on the back of some strong UK PMIs, with the manufacturing index demonstrating a particularly bullish jump and growth in the domestic service sector also advancing on the month. These positive figures appeared to bode well for the continued expansion of the country’s GDP, shoring up faith in the domestic economy and raising hopes that the Bank of England (BoE) could be spurred to take a more hawkish stance at Thursday’s policy meeting.
However, traders were ultimately disappointed as the Monetary Policy Committee (MPC) voted 8-1 in favour of leaving interest rates unchanged with the accompanying meeting minutes adopting a far more dovish tone than expected. The central bank’s latest Inflation Report showed that policymakers had dialled back their expectations, suggesting that domestic inflation would reach the 2% target in the third quarter of 2017. Altogether this was seen to put the end to the hopes of a 2015 interest rate move from the BoE, with many economists anticipating that rates will remain unchanged for another year.
While the GBP/NZD exchange rate was quick to slump in the wake of these dovish signals, the pairing made a strong resurgence on Friday, driven up by the publication of the October US Change in Non-Farm Payrolls report. Pundits were surprised as the US economy was found to have added 271,000 new jobs on the month, a far more bullish number than the forecast 185,000. The odds of a December interest rate rise from the Federal Open Market Committee (FOMC) rose sharply, strengthening the US Dollar substantially to the detriment of the risk-sensitive ‘Kiwi’.
Over the weekend Chinese Imports remained in contraction territory, although the figure did not experience quite so marked a retreat as it had in September, coming in at -18.8% as opposed to -20.4%. However, as the forecast had been for a figure of -15.2% the data still weighed further on the New Zealand Dollar.
Later in the week the ‘Kiwi’ may yet rally, with the latest local Manufacturing PMI potentially offering some indication of strength within the domestic economy. Should this figure also suggest weakness, however, the currency could retreat further as the chances of fresh monetary loosening from the Reserve Bank of New Zealand (RBNZ) before the end of the year loom larger. To this end the latest comments from RBNZ Governor Graeme Wheeler could also stand to drive the South Pacific currency lower.
Heads Up
Summary of major upcoming data releases that we think may move the market.