With swap traders pricing in a 77% chance that the Reserve Bank of New Zealand (RBNZ) will cut the overnight cash rate on 11th August, there is a high likelihood that New Zealand Dollar exchange rates will decline over the coming week.
GBP NZD Exchange Rates Face Downside Pressures
Although New Zealand Dollar exchange rates are expected to weaken over the coming week amid speculation of near-term RBNZ policy changes, the GBP NZD exchange rate is likely to struggle as GBP faces ongoing uncertainty with regards to the UK’s political and economic future. What’s more, the Pound is being viewed as temporarily risk-correlated given the fallout from Brexit, so even damp market sentiment is unlikely to push GBP NZD exchange rates higher.
With that said, however, the low trade weighting of Sterling has seen a dramatic increase in foreign investment. Additionally, export growth is likely to increase significantly. There is already evidence of this, with British gas exports to Belgium the most since June 2013. In the longer-term, therefore, the GBP NZD exchange rate has potential to appreciate significantly.
NZD Exchange Rates Forecast to Decline
The New Zealand Dollar is likely to decline against the majority of its major peers in the short-term due to heightened speculation that the Reserve Bank of New Zealand will look to ease policy during the August interest rate decision. Odds of an adjustment increased because the central bank recently tightened lending conditions to landlords, easing pressure on the housing bubble. As a result, RBNZ policymakers have greater scope for intervention without fear of inflating house prices.
Dairy prices will continue to play a vital role in demand for the ‘Kiwi’ (NZD). The comparatively low price of whole milk powder, New Zealand’s biggest export, will have serious consequences for economic growth. Even as the government strives to change New Zealand’s trade-based economy, dairy exports still account for a large portion of GDP.
Domestic Data to take a Back Seat in GBP NZD Movement
Over the coming week there will be comparatively few domestic ecostats with potential to provoke marked GBP NZD exchange rate volatility. With the exception of Friday’s first post-Brexit UK sectoral PMIs, this week’s British data pertains to a pre-Brexit Britain. As a result it will be unlikely to have as significant an impact.
The post-Brexit Manufacturing, Services and Composite PMIs will be of high importance, however. Traders will be paying particular attention to the Services PMI given that the services sector accounts for the largest portion of British GDP and is the sector most likely to be adversely impacted by Brexit.
In terms of New Zealand’s data docket, Thursday’s Credit Card Spending data is the only publication of note. It will be unlikely to have a major impact, however, with market sentiment the main driver of NZD exchange rate changes.
Over the past week, the GBP NZD exchange rate was trending within the range of 1.8616 to 1.8861.