After New Zealand’s second quarter Consumer Price Index failed to strengthen as forecast, the New Zealand Dollar fell further out of favour with investors. Weak inflationary pressure remains one of the key concerns of the Reserve Bank of New Zealand (RBNZ), suggesting that the chances of an imminent interest rate cut are rather higher as a result. Nevertheless, the modest recovery in prices seen at the latest GlobalDairyTrade auction helped to shore up the commodity-correlated ‘Kiwi’ on Tuesday.
Despite the somewhat outdated nature of the data, the Pound was given a boost when the UK’s ILO Unemployment Rate was found to have unexpectedly fallen in the three months to May. This suggested that the domestic economy had been in a rather robust state ahead of the EU referendum. Although this improvement has likely seen something of a reversal in the wake of the UK’s decision to Brexit, that was not enough to prevent the GBP NZD exchange rate from rallying strongly – with the pairing surging to a three-week best of 1.9040.
The appeal of the New Zealand Dollar took a more substantial battering on Wednesday evening with the release of the RBNZ’s Economic Assessment update. Policymakers were unequivocal in expressing their concerns over the relative strength of the ‘Kiwi’ and its detrimental impact on domestic inflationary pressure. Strong hints were dropped that further monetary policy easing is on the cards, prompting the antipodean currency to plunge sharply against rivals.
Signs of Weakness in UK Economy Dented GBP NZD Exchange Rate
Weaker New Zealand credit card spending added further downside pressure to the ‘Kiwi’, with consumer confidence appearing to have faltered. Lower spending would suggest that inflation is unlikely to be pushed higher in the near future, increasing the case for the RBNZ to cut rates sooner rather than later. However, the GBP NZD exchange rate struggled to maintain its uptrend in spite of this, due to some equally disappointing UK data.
Investors reacted decisively to the first major post-Brexit ecostats, which indicated that the negative impact of the Brexit vote had been more pronounced than initially feared. The flash Manufacturing, Services and Composite PMIs for July all showed a sharp reversal, plunging below the neutral baseline of 50 to enter contraction territory. Naturally this prompted some concern, with the GBP NZD exchange rate falling back into the region of 1.8730 as the impetus on the Bank of England (BoE) to act appeared to build.
This impression was furthered on Monday by a shockingly sharp decline in the CBI Business Optimism Index. Sliding from -5 to -47, this furthered the impression that the outlook of the UK economy is less than optimistic as the country’s future remains decidedly uncertain. Comments from BoE Monetary Policy Committee (MPC) member Martin Weale pushed the Pound lower still against rivals as the previously hawkish policymaker indicated his belief that policy should be eased imminently.
Despite the New Zealand trade surplus narrowing further than forecast in June, the ‘Kiwi’ went on a bullish run across the board on Tuesday. With the odds of an August RBNZ rate cut increasingly priced into the currency there was little reason for investors not to buy back in to NZD, particularly with risk appetite on the rise once again.
Hawkish Fed Commentary Predicted to Weigh on New Zealand Dollar
Wednesday is expected to be a particularly volatile day for the GBP NZD exchange rate, with the release of the second quarter UK GDP report and the latest Federal Open Market Committee (FOMC) policy meeting. Even though the Fed is not expected to make any change at this juncture, markets will be interested to receive guidance on the potential date of the next interest rate hike. Any suggestions of a 2016 policy move are likely to dent the New Zealand Dollar, increasing the pressure on the RBNZ to act themselves.
A robust second quarter GDP result could prompt the Pound to trend higher against its peers, despite the damage the economy has since experienced as a result of the referendum outcome. If growth is shown to have been relatively strong ahead of the Brexit volatility the GBP NZD exchange rate could benefit. Regardless, the Pound is expected to maintain its downside bias ahead of next week’s BoE rate decision.