Foreign Currency Market Update – GBP / NZD Update
Although the ‘Kiwi’ was lacking in any domestic stimulus over the holiday period the Pound Sterling to New Zealand Dollar exchange rate nevertheless ended the year on a downtrend. Largely this was caused by the softening of the Pound in response to an unexpectedly large increase shown by the December Nationwide Housing Prices report. As values increased by 4.5% on the year, rather than 3.8%, this led to a resurgence in property bubble fears which saw investors generally move away from the British asset.
The New Year saw the pairing rally strongly, however, after a 7% drop in share prices triggered the early closure of stock markets in China. As this volatility followed on from a weaker-than-expected Chinese Manufacturing PMI commodity prices entered a sharp slump which endured throughout the day. Signalling the tenth consecutive month of contraction within the manufacturing sector of the world’s second largest economy, this did little to ease global slowdown concerns.
Speculation of an overheating UK housing market were stoked further as November Mortgage Approvals defied expectations to grow from 69,900 to 70,400. Also denting confidence in the Pound was a disappointing Manufacturing PMI, which slipped to 51.9 rather than climbing to 52.8 as traders had hoped. Although the sector has remained in a state of growth this relative weakness does not appear to bode well for the fourth quarter GDP result, particularly as the winter storms have already shaved an estimated 0.25% off the nation’s productivity. However, due to the softness of the ‘Kiwi’ the GBP/NZD exchange rate remained on a persistent uptrend.
Pundits were rather more encouraged by the revelation that the UK’s December Construction PMI had bettered forecast, climbing from 55.3 to 57.8. This surprisingly strong expansion helped to shore up demand for Sterling, although the impact was somewhat limited due to the more minimal contribution this particular sector forms to the national GDP.
Risk demand improved overnight, meanwhile, after the People’s Bank of China (PBOC) intervened to prop up share prices and avoid another day of significant losses. This failed to particularly support the weakened New Zealand Dollar, though, as investors opted for caution ahead of the year’s first GlobalDairyTrade auction. These worries proved founded as dairy prices fell by -1.6%, indicating that weakness persists within the market and boding ill for the outlook of the New Zealand economy.
Should Wednesday’s UK Services PMI show slowness, however, the GBP/NZD exchange rate is likely to lose ground, as the service sector forms the single largest contribution to the UK GDP. Any additional stock market turmoil could hold the New Zealand Dollar on more of a downtrend, as could the continued strengthening of the US Dollar.
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