Investors continued to find little reason to buy into the Pound this week following the UK’s surprise vote to leave the EU. With both the Conservative and Labour parties in a state of turmoil, anxiety pervaded the market and put continued pressure on Sterling. Uncertainty is unlikely to substantially ease for the foreseeable future as the activation of Article 50 and start of formal exit proceedings seems to remain a distant prospect.
Despite investor jitteriness, the New Zealand Dollar strengthened last week – with demand boosted by better-than-expected domestic trade data. The May trade surplus unexpectedly widened from 326 million to 358 million, suggesting that the New Zealand economy was in a relatively robust state. This offset some of the market malaise triggered by the vote to Brexit, helping to extend the ‘Kiwi’s gains against the Pound further.
The appeal of higher-yielding assets was also improved by the rapidly declining odds of the Federal Reserve introducing an interest rate hike before the end of the year. Members of the Federal Open Market Committee (FOMC) had already taken a more dovish tone in response to some poor domestic data, with the negative implications of Brexit offering a further deterrent to policymakers. With some investors predicting that the Fed could push back the resumption of its monetary tightening cycle far into next year, or later, the New Zealand Dollar edged higher.
Although the Money Supply M3 for May pointed towards weaker inflationary pressure in New Zealand, this failed to particularly boost the GBP/NZD exchange rate on Thursday. Confidence in the ‘Kiwi’ strengthened following a particularly solid jump in the NBNZ Business Confidence measure for June, which would seem to suggest improved optimism within the domestic economy.
Prospect of BoE Easing Weakened Pound Demand
However, confidence in the Pound did show some signs of picking up ahead of commentary from Bank of England (BoE) Governor Mark Carney, with markets awaiting guidance from the policymaker. These gains were ultimately lost once the Governor indicated that monetary loosening is likely incoming, with Sterling plunging anew in response. Even though Carney did express confidence in the ability of the UK economy to weather the volatility provoked by the outcome of the EU referendum markets nevertheless retreated from the vulnerable Pound. As a result the GBP/NZD exchange rate tumbled from 1.8894 to 1.8579 on Thursday afternoon.
A stronger-than-expected UK Manufacturing PMI failed to shore up sentiment ahead of the weekend, as this improvement did not take into account the fallout of the referendum result. Concerns over the UK economy were exacerbated, however, when Monday’s Construction PMI fell significantly short of forecast. Sliding from 51.2 to 46.0, this signalled that the sector had returned to a state of contraction even before Brexit worries began to really take hold of the economy.
The outlook seemed even glummer on Tuesday, with the Services PMI sliding to a thirty-eight month low of 52.3. Anxiety was also stirred up by the BoE Financial Stability Report, as well as the news that two major property funds had been prompted to suspend redemptions. With investor confidence continuing to weaken, this saw the GBP/NZD exchange rate drop to a fresh nearly-three-year low of 1.8183.
Markets were relieved, meanwhile, to find that the Chinese Services PMI had ticked higher in June. This would seem to suggest that China’s attempts to rebalance its economy are moving in the right direction, easing fears of a renewed slowdown. As a result the appeal of commodity-correlated currencies remained heightened, although uncertainty stemming from the UK continued to put downside pressure on risk appetite.
‘Kiwi’ Predicted to Benefit from Bearish US Data
Domestic data from New Zealand will be limited in the remainder of the week, with the ‘Kiwi’ expected to take its cues from wider market sentiment and developments in the US. If signs continue to point towards a slowdown in the US economy, and the odds of the Fed raising interest rates continue to diminish, then the antipodean currency is likely to benefit. However, if risk aversion remains heightened then the GBP/NZD exchange rate could yet regain some ground.
Brexit worries seem set to weigh on the Pound for the foreseeable future, particularly as the government response remains in limbo thanks to the leadership contest. If the latest UK production stats and NIESR Gross Domestic Product Estimate also provide evidence of the negative impact of uncertainty on the domestic economy sentiment is likely to deteriorate further. Should data prove more positive, though, markets are still likely to remain preoccupied with worries over the future of the domestic economy.