The relative strength of the New Zealand Dollar vs peers like the Pound and US Dollar has resulted in speculation that the RBNZ will ease policy within the next few meetings in order to prevent NZD trading providing a real drag on economic growth.
Over the past seven days the Pound Sterling to New Zealand Dollar exchange rate was trending within the range of 2.1244 to 2.1722.
‘Kiwi’ Trade Weighting High despite Weaker Dairy Prices
Although market sentiment has seen significant swings the New Zealand Dollar held a high trade weight versus most of its major peers. This is mostly in response to speculation that New Zealand’s tourism industry will make up for lost growth in exports. Also supportive of demand for the ‘Kiwi’ (NZD) has been mounting speculation that the People’s Bank of China (PBoC) will continue to employ extensive stimulus measures in order to avoid major Yuan depreciation and Chinese equities crashing. Speculation that the Federal Reserve will be unlikely to hike the overnight cash rate anytime soon is also aiding the New Zealand Dollar’s uptrend.
In contrast, the UK asset generally softened versus its major peers last week as trader focus was dominated by Prime Minister David Cameron’s attempts to secure reforms to change the UK’s relationship with the European Union. Such is the detrimental impact of political uncertainty that positive domestic data, which showed better-than-anticipated retail sales and lower-than-expected government spending, wasn’t enough to offset Sterling losses.
GBP/NZD Exchange Rate Dives as London Mayor Calls for a ‘Brexit’
On Monday the Pound Sterling dived versus its major peers following news that London Mayor Boris Johnson will campaign for the UK to leave the EU. This came only days after PM Cameron managed to secure reforms and set the date of the EU referendum to 23rd June. Johnson is considered a political heavyweight and is widely expected to succeed Cameron as the leader of the Conservatives. Therefore, his influence is likely to give those hoping for a ‘Brexit’ a significant boost.
On the other side of the globe the New Zealand Dollar advanced versus most of its major peers on Monday. The appreciation can be linked to improved market sentiment as risk-appetite tracks global equity market gains. Rising crude oil prices also had a marked impact on demand for high-yielding assets. In addition, New Zealand’s economic data produced positive results. January’s Credit Card Spending saw growth of 8.9% on the year.
Will the RBNZ Cut Rates to Devalue NZD?
Given that the New Zealand Dollar is resiliently holding a comparatively strong trade weighting, there is a good chance that the Reserve Bank of New Zealand (RBNZ) will look to ease policy sometime soon. However, uncertainty regarding the timing of the next Federal Reserve benchmark interest rate hike may cause the RBNZ to hold off from reducing rates. If the Fed announces intentions to hike the OCR soon the New Zealand Dollar may lose value without intervention. New Zealand economic data will be incredibly thin on the ground this week, with only Thursday’s Trade Balance data likely to cause ‘Kiwi’ changes. Therefore, New Zealand Dollar movement will likely continue to be dictated by market sentiment.
Pound Sterling Exchange Rates to Remain Weak?
Many will remember the massive turmoil the Pound Sterling faced ahead of the Scottish referendum. Given that the impact of a British exit from the EU has potentially much more widespread ramifications, there is every chance that the UK Pound will endure even greater price swings over the coming months. GBP movement will largely be dictated by opinion polls, with domestic data projected to be less impactful. However there will still be a number of potentially influential domestic ecostats this week. Perhaps most significant will be fourth-quarter Gross Domestic Product, which is forecast at 1.9%.
Heads Up
Summary of major upcoming data releases that we think may move the market.