Markets were reassured last week when the Reserve Bank of New Zealand (RBNZ) opted to leave interest rates unchanged. Some investors had feared the potential for another rate cut, with worries over the possibility of further monetary loosening putting pressure on the ‘Kiwi’ ahead of the meeting. Although policymakers ultimately maintained an easing bias, this was not enough to prevent the New Zealand Dollar from rallying strongly, accelerating the downtrend of the GBP/NZD exchange rate.
Confidence in the Pound recovered somewhat on Thursday, however, as the UK’s trade deficit was found to have unexpectedly narrowed in April. This would seem to suggest that referendum uncertainty had not been dragging on the domestic economy as many had feared, boosting the appeal of Sterling. However, in spite of this positive data, markets showed an increasing reticence towards the softened British currency.
Risk appetite generally declined in the wake of a disappointing Chinese Consumer Price Index report, meanwhile, as inflation in the world’s second largest economy stalled on the year from 2.3% to 2.0%. This reminder of the slowdown pressures facing China prompted markets to move away from the higher-risk New Zealand Dollar in favour of its rivals.
Worries of a hard landing are likely to see the dairy sector come under renewed pressure, with further weakness in the commodity set to undermine the ‘Kiwi’.
A surprise contraction in New Zealand card spending helped to boost the GBP/NZD exchange rate ahead of the weekend, pointing to a weaker level of domestic consumer confidence. Investors were also inclined to sell out of the ‘Kiwi’ due to a stronger-than-expected University of Michigan Confidence Index. The sign of robustness within the US economy reversed some of the ‘Greenback’ bearishness prompted by other disappointing local ecostats, even though the Fed remain highly unlikely to hike interest rates imminently.
GBP/NZD Exchange Rate Hit 14-Month Low due to Opinion Polls
‘Brexit’ worries have been exerting further downside pressure on the Pound as the EU referendum draws closer. Several opinion polls have suggested that the ‘Leave’ campaign is in the lead, with one particularly notable survey putting the ‘Brexiteers’ ten points clear of their rivals. This naturally spooked markets, pushing up the odds that the UK will vote to leave the EU and triggering another sharp Pound Sterling slump. As a result the GBP/NZD exchange rate slipped to a fourteen-month low of 1.9981 on Monday morning.
However, more weak Chinese data and increasing market risk aversion allowed the Pound to begin clawing back ground against the ‘Kiwi’. This rally, partly driven by consolidation trading, also benefitted from a disappointing New Zealand food price survey. Domestic food prices were found to have contracted -0.5% on the month in May, a result which has negative implications for New Zealand’s inflation outlook. Falling food prices would suggest that inflationary pressure in the local economy weakened in May, which could encourage the RBNZ to cut interest rates again sooner rather than later.
Fed Policy Decision Expected to Provoke ‘Kiwi’ Volatility
Referendum worries are expected to remain a negative influence on the Pound, with volatility set to become more pronounced the nearer we get to next week’s vote. If the polls continue to suggest a ‘Leave’ camp victory the GBP/NZD currency pair is likely to retreat, with the possibility of a ‘Brexit’ severely reducing the appeal of Sterling. This is generally expected to overshadow domestic data, although Thursday’s Bank of England (BoE) policy meeting could provoke some additional movement.
If dairy prices climb at the latest GlobalDairyTrade auction the New Zealand Dollar could enjoy a boost against rivals. Investors may be more reticent towards commodity-correlated currencies ahead of Wednesday’s Federal Open Market Committee (FOMC) interest rate decision, in spite of the belief that there will not be a rate hike. Should the Fed opt for a more hawkish tone risk appetite could remain limited, although markets have been increasingly dismissive of the chances of a summer interest rate move.