A run of poor economic reports for the UK has undermined the GBP NZD exchange rate, with weak US data helping the New Zealand Dollar advance.
Pound Weakens as Data Paints Gloomy Picture of UK Economy since Brexit
Other than an unexplained market spike from 1.8344 to 1.8820 late on Friday night, the Pound New Zealand Dollar exchange rate has weakened over the course of the last few days. GBP NZD had hit a two-week low of 1.8310 by the close of trading after another week of disappointing post-Brexit data.
While investors were calmed on Tuesday by the news that city banks had accepted very little additional liquidity from the Bank of England (BoE) to help them deal with Brexit turmoil, Wednesday’s GDP figures soured appetite. The report showed economic expansion was actually better-than-expected, yet this was not met positively by the markets. Growth of 2.2% in the second quarter simply showed that the economy was strengthening before the Brexit referendum. Analysts were quick to point out that an unusually strong April had distorted the figures, suggesting that the economy was weaker heading into the Brexit turmoil than the report suggested.
Key US Data Weakens US Economic Outlook; New Zealand Dollar Advances
The New Zealand Dollar was able to advance largely thanks to weak US data, with few domestic reports to motivate the ‘Kiwi’. The only positive data from New Zealand last week was Thursday’s building permits result for June, which showed a huge 16.3% growth in the number of permits issued.
Several pieces of US data undermined market confidence in the US economy, pushing back the likelihood of an interest rate hike from the Federal Reserve well into 2017. As a result, demand for high-risk assets increased and the New Zealand Dollar was able to advance, even though markets have been anticipating that the Reserve Bank of New Zealand (RBNZ) will cut interest rates soon.
Better-than-Expected UK Construction Helps Pound Curb Losses against New Zealand Dollar
The first measure of UK construction since July has bettered expectations, slipping from 46 to 45.9 rather than the forecast 44. With markets fearing a greater decline, the Pound has been able to claw back losses, although the sector still remains in significant trouble. The current score represents the fastest pace of decline since 2009 and overall the outlook for the UK economy is gloomy. As Markit’s Chief Economist Chris Williamson explains;
‘If the construction PMI is combined with the final manufacturing and the flash services PMI, the ‘all sector’ PMI will have sunk to 47.3 from 51.9 in June. As such, the surveys signal the steepest fall in business activity since April 2009; the turnaround in the index (a 4.6 point drop) being the largest ever deterioration recorded since the surveys began in 1997.’
Still, the better-than-expected construction PMI today has helped the Pound resist New Zealand Dollar appreciation, although the ‘Kiwi’ is still making strong gains. This is thanks to the latest survey of inflation expectations from the Reserve Bank of New Zealand (RBNZ). Taken every quarter, the survey reports the average expectation for annual inflation over the coming eight quarters. The latest survey has shown expectations have crept marginally higher, rising from 1.64% to 1.65%.
While not a huge leap, it shows that inflationary pressures in New Zealand are building towards the RBNZ’s target of 2%. It also means that there is less pressure on the central bank to ease policy, although an interest rate cut is still expected in the near-term.
Pound New Zealand Dollar (GBP NZD) Exchange Rate Forecast; Dairy Auction and Finalised UK PMIs Ahead
GBP NZD is likely to be moved by the approaching GlobalDairyTrade auction, taking place later today. The outlook doesn’t look particularly positive for the New Zealand Dollar; the price index has either stagnated or slipped at the three most recent auctions. Another decline will weaken the ‘Kiwi’ and may allow GBP NZD to break above opening levels. A rise in milk prices will push the New Zealand Dollar even higher.
Headwinds for the Pound will come from tomorrow’s finalised services and composite PMIs for July. These both crashed deeper into negative territory than indicated by their flash estimates. No changes are expected to the finalised figures, but the same was thought of yesterday’s manufacturing index and that was cut from 49.1 to 48.2.
Also weighing on the Pound over the coming days will be expectations of an interest rate cut from the BoE. The Monetary Policy Committee (MPC) meets on Thursday and markets are widely expecting a -0.25% cut to the benchmark interest rate.