Foreign Currency Market Update – GBP / NZD Update
While the ‘Kiwi’ saw some significant losses ahead of Wednesday’s Reserve Bank of New Zealand (RBNZ) policy meeting, markets ultimately reacted rather positively to policymakers’ decision to slash interest rates by 0.25%. As traders had been anticipating this fresh round of monetary loosening from the central bank, experts deemed that the South Pacific currency had been somewhat oversold in the days leading up to the decision. Consequently the Pound Sterling to New Zealand Dollar exchange rate slumped sharply from 2.2892 to 2.2505, trending lower throughout much of the week.
Thursday proved a particularly volatile day of trading for the Pound, meanwhile, after the UK’s Visible Trade Balance was found to have widened further than expected. The October trade deficit increased from -8.8 billion to -11.8 billion Pounds, offering a less-than-encouraging indication of the domestic economy’s strength. Nevertheless, this weaker showing failed to markedly weigh on Sterling ahead of the final Bank of England (BoE) meeting of 2015, as investors hoped for that members of the Monetary Policy Committee (MPC) might prove more hawkish than in November.
Pundits were generally disappointed, however, as the MPC voted 8-1 in favour of leaving interest rates unchanged at their record low of 0.50%. The accompanying meeting minutes also failed to give any indication that an interest rate move should be expected in the earlier months of 2016, as policymakers highlighted persistent concerns with negative global headwinds and weak domestic inflation. In response the GBP/NZD exchange rate plunged to a fresh weekly low of 2.2364 as the appeal of the Pound was substantially dented.
As commodity markets remained in a rather volatile state, and despite the US posting some data shortfalls on Friday, the ‘Kiwi’ struggled to hold onto its recent buoyancy ahead of the weekend. Conversely, the Pound was boosted as the IMF delivered its latest assessment of the UK economy, also calling on the BoE to hold off on raising interest rates until inflationary pressure had clearly improved. While several downside risks to the nation’s continued growth were highlighted, among them the possibility of a Brexit, investors chose to take a more positive impression from the report.
A substantially strengthened New Zealand Services PMI, which climbed from 56.5 to 59.8 in November, has helped to shore up demand for the South Pacific currency on Monday. The GBP/NZD pairing has also been weighed down by the revelation that the UK’s housing market had continued to accelerate in December. As the Rightmove House Index rose from 6.2% to 7.4% on the year traders are once again showing signs of concern that the current housing bubble is only worsening, raising fears that a crash could be on the horizon.
The approaching Federal Open Market Committee (FOMC) interest rate decision is likely to increasingly weigh on the New Zealand Dollar over the coming days, to the benefit of the GBP/NZD exchange rate. Should the upcoming GlobalDairyTrade auction fail to deliver a sustained recovery in the price of milk solids the ‘Kiwi’ could weaken further, while the Pound will be looking to rally on the back of an improved UK Consumer Price Index.
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Summary of major upcoming data releases that we think may move the market.