After the Reserve Bank of New Zealand (RBNZ) surprised markets with an unexpected interest rate cut, the New Zealand Dollar slumped against the Pound and the currency has largely remained weak ever since.
The Pound Sterling to New Zealand Dollar (GBP/NZD) exchange rate trended between 2.0901 and 2.1491.
‘Kiwi’ Remains Weak as Dairy Price Forecast Cut
New Zealand’s main industry took a hit last Tuesday after the world’s largest dairy exporter, Fonterra, cut their forecast for dairy prices again. The cooperative now expects to pay farmers NZ$3.90 for a kilogram of milk solids, down from the previous rate of NZ$4.15, which itself was over a Dollar below the estimated breakeven price for farmers.
The latest cut is anticipated to slash -NZ$400 million from the income of the cooperative’s 10,500 farmers, meaning 80% will operate at a loss during the coming season.
Positive UK Industry Figures Boost Pound Sterling
The Pound received some domestic support on Wednesday after production data for January printed better-than-expected. Industrial Production grew 0.2% year-on-year, while the decline in manufacturing slowed from -1.7% to -0.1%. However, the National Institute for Economic and Social Research (NIESR) released their forecast for GDP, predicting a slowdown in the three months to February from 0.4% the previous period to 0.3%. Overall, however, NIESR anticipated better growth for Q1 2016 than was seen in Q4 2015.
RBNZ Delivers Shock Rate Cut, New Zealand Dollar Tanks
Markets were confidently expecting that the Official Cash Rate (OCR) would be left on hold at 2.50% during the policy meeting on Wednesday. However, the board instead voted to cut the OCR by -0.25%, citing low commodity prices, volatile financial markets and the slowdown in growth in China. Although the outlook for the domestic economy remained strong, the RBNZ’s falling confidence in global conditions caused a severe drop in the New Zealand Dollar, allowing the GBP/NZD exchange rate to leap from 2.0901 to 2.141.
This and the price cut to dairy forecasts have conspired to keep the New Zealand Dollar weak during the past few days, with the ‘Kiwi’ unable to recover from its initial drop in value.
GBP/NZD Exchange Rate Forecast for the Week Ahead
Tomorrow will be a key data day, with high impact releases from both the UK and New Zealand likely to spark significant volatility in the GBP/NZD exchange rate.
After a slew of UK labour market data, including Average Weekly Earnings growth figures, George Osborne will deliver his Budget speech to Parliament. Investors are expecting harsh cuts to be announced and it remains to be seen whether these will be interpreted as positive, in that they reduce the deficit, or negative in that they could hamper economic growth or consumer spending.
Headline US data could drive the New Zealand Dollar, with the Consumer Price Index followed by the next interest rate decision by the Federal Reserve. During the Australasian session, New Zealand GDP figures for the final quarter of 2015 are expected to show a slowdown in expansion, which would further weaken the ‘Kiwi’
Heads Up
Summary of major upcoming data releases that we think may move the market.