Support has remained somewhat limited for the New Zealand Dollar over the past week, although the ‘Kiwi’ was initially pushed higher against rivals in response to China’s fourth quarter GDP results. While the world’s second largest economy was shown to have slowed to its lowest level of growth in twenty-five years, pundits were generally confident that the weaker showing would prompt additional economic stimulus measures from Beijing. However, this early rally failed to sustain itself as market confidence quickly waned, with some economists continuing to suggest that the current slowdown could be more severe than admitted.
Weakening Dairy Prices and Inflation Drag on New Zealand Dollar
The appeal of the South Pacific currency declined further in response to weakening milk solid prices at the latest GlobalDairyTrade auction. For the second consecutive session dairy values dropped, erasing some of the recovery seen towards the end of 2015, in spite of the revelation that New Zealand’s production had dipped on the year in December. This fresh downturn does not bode well for the domestic dairy industry and is likely to drag on the outlook of the New Zealand economy in the near-future.
Investors were equally unimpressed by the fourth quarter New Zealand Consumer Price Index report, which showed a sharper-than-expected decrease in inflationary pressure both on the year and the quarter. Of particular concern was the marked quarterly contraction of -0.5%, which seems to illustrate the negative impact adverse global headwinds have been having on the local economy. This weaker showing could prompt the Reserve Bank of New Zealand (RBNZ) into slashing interest rates sooner rather than later in order to keep inflation from retreating further, a prospect which saw the ‘Kiwi’ softened against the majors.
Dovish BoE Commentary Weighed on GBP/NZD Exchange Rate
Demand for the Pound, however, was also dented as Bank of England (BoE) Governor Mark Carney indicated that interest rates were likely to stay at their current level for some time to come, prompting some industry experts to push back their forecasts for the first rate hike as far as early 2017. This counteracted the more bullish impact of Tuesday’s stronger UK Consumer Price Index, which showed baseline inflation rising back to 0.2%.
Further dovishness was encouraged as a result of Wednesday’s raft of UK employment data, despite the ILO Unemployment Rate unexpectedly falling to a fresh low of 5.1%. Average Weekly Earnings continued to show weakening growth, and as this is an area members of the Monetary Policy Committee (MPC) have previously highlighted as a barrier to higher interest rates the Pound trended lower in response.
PBOC Intervention Keeps NZD Higher Amid Fresh Stock Slide
While stock markets have remained in a generally volatile state over the last week, with a modest two-day rally having been wiped out this week as traders struggle to maintain a more optimistic attitude, the New Zealand Dollar has nevertheless regained some of its strength. With the People’s Bank of China (PBoC) having once again intervened in local markets, injecting 440 billion Yuan into the system in order to boost liquidity ahead of the Chinese New Year celebrations, the ‘Kiwi’ has been bolstered in spite of persistent risk aversion.
The GBP/NZD exchange rate could see some fresh gains, however, ahead of the first RBNZ policy meeting of the year with some speculation that policymakers could move to cut interest rates in response to recent turmoil.
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