An unexpectedly sharp contraction in Chinese Imports on the year helped to push the New Zealand Dollar lower against rivals at the start of last week. Markets were naturally concerned that imports to the world’s second largest economy had declined -5.7% in April, prompting a general decline in commodity-correlated currencies. With dairy prices still heavily under pressure, this dip in demand did not seem to bode well for the outlook of the New Zealand economy, encouraging the GBP/NZD exchange rate higher.
Wednesday saw this uptrend reversed, however, as the UK’s Industrial and Manufacturing Production figures disappointed. The domestic industrial sector was found to have entered its third recession since 2008, while manufacturing output saw its sharpest single fall since May 2013 at -1.9%. This weaker showing raised concerns that the UK economy is coming under increasing pressure, particularly as the steel crisis continues to hang over the domestic industry.
GBP/NZD Rallied as BoE Delivered ‘Brexit’ Warning
Demand for the ‘Kiwi’ increased when New Zealand’s Manufacturing PMI demonstrated a persistently strong level of growth. Rising from 54.7 to 56.5 this prompted a general increase in market optimism and saw the commodity-correlated currency trend higher. The suggestion of a more robust domestic economy also encouraged hopes that the Reserve Bank of New Zealand (RBNZ) would not be inclined to cut interest rates in the near future.
Ahead of the Bank of England’s (BoE) May policy meeting the GBP/NZD exchange rate extended its losses, hitting a three-day low of 2.1121 as rumours of a potential dovish rebellion circulated. Ultimately, however, the Monetary Policy Committee (MPC) voted unanimously to leave interest rates on hold at 0.5%, a move that prompted a strong Pound rally.
More importantly, and perhaps surprisingly, the BoE issued its strongest words yet on the potential negative impact of a vote to leave the EU. While the central bank lowered its growth forecasts for the coming year this was overshadowed by the more optimistic reaction to cautions over the outcome of the June referendum. Governor Mark Carney indicated that the UK could fall into recession in the event of a ‘Brexit’, a warning that encouraged hopes of a ‘Remain’ camp victory.
Weaker New Zealand Retail Sales prompted the ‘Kiwi’ to weaken once again ahead of the weekend, with risk appetite also dented by stronger-than-expected US data. The US consumer confidence and retail spending figures prompted renewed speculation that the Federal Open Market Committee (FOMC) could raise interest rates sooner rather than later.
Consequently the GBP/NZD exchange rate ended the week on a stronger footing, trending in the region of 2.1219.
Pound Made Bullish Gains after ‘Remain’-Positive Poll
The latest New Zealand Services PMI shored up the New Zealand Dollar at the start of the new week, counteracting the more negative impact of disappointing Chinese data. This bullishness proved short-lived, however, due to hawkish commentary from members of the FOMC. With the possibility of a June interest rate hike sharply raised the ‘Kiwi’ slid back amidst an increase in risk aversion. As an imminent hike from the Fed would increase the chances of the RBNZ cutting again this weighed heavily on the appeal of the antipodean currency.
While the UK’s latest inflation figures disappointed and unemployment data proved mixed, this did not prevent GBP/NZD from rallying strongly on Wednesday. Markets were greatly encouraged by the latest IPSOS MORI poll, which put the ‘Remain’ camp at 55% and ‘Leave’ at just 37%. As this seemed to suggest that the odds of a ‘Brexit’ were lower the Pound surged to a fresh three-month high of 2.1607 against the ‘Kiwi’.
Should the April Fed meeting minutes suggest a more dovish outlook on monetary policy the New Zealand Dollar could rally, particularly if the ANZ Consumer Confidence Index points towards more robust domestic sentiment. Stronger credit card spending figures could also provide investors with incentive to buy back into the softened ‘Kiwi’.
Thursday’s UK Retail Sales report may extend the bullish run of the GBP/NZD exchange rate, providing consumer demand rose in April. If referendum uncertainty was found to have weighed more severely on the retail sector, however, the Pound is likely to fall back out of favour with markets. Profit taking is also likely to push the GBP/NZD currency pair back from its recent high.
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