Even though the New Zealand Services PMI for July weakened on the month, this did not dent the appeal of the ‘Kiwi’. Despite this dip the measure continued to point towards a solid level of expansion within the sector, suggesting that the domestic economy remains in a stronger state. This increased the belief amongst investors that the Reserve Bank of New Zealand (RBNZ) will not opt to cut interest rates again in the near future, boosting the ‘Kiwi’. Risk appetite also remained on the up in the wake of the previous week’s disappointing US data, offering further support to the commodity-correlated currency.
Confidence in the Pound soon strengthened, however, thanks to a better-than-expected UK Consumer Price Index report. Inflationary pressure was found to have edged up from 0.5% to 0.6% in July. Although the Bank of England (BoE) seems likely to loosen monetary policy again in the near future in order to prevent inflation from substantially overshooting the 2% target, Sterling advanced across the board. As a result the GBP NZD exchange rate was able to climb away from its monthly low of 1.7760.
Further evidence of strength within the New Zealand economy came in the form of the second quarter labour market data, which significantly bettered forecasts. The Unemployment Rate clocked in at 5.1% as opposed to 5.3%, suggesting that the job market had tightened in the last quarter despite a corresponding rise in the Participation Rate. This bullish showing encouraged greater confidence in the ‘Kiwi’, although the increasingly bearish mood of markets prevented a particularly strong rally.
Positive Post-Referendum UK Data Boosted GBP NZD Exchange Rate
The GBP NZD exchange rate continued to benefit from unexpectedly positive post-referendum data throughout the week, with the July Jobless Claims and Retail Sales figures both providing stronger showings than anticipated. Markets were quick to shore up the Pound when the number of those seeking unemployment benefits showed a surprise fall of -8,600, something which seemed to point towards continued confidence amongst businesses. With the UK economy seemingly having shrugged off the initial impact of the Brexit vote there was little reason for investors to sell out of Sterling.
Before the close of the week there was greater volatility for the antipodean currency thanks to speculation over the outlook of the Federal Reserve. Although the most recent Federal Open Market Committee (FOMC) minutes proved more dovish than anticipated, this did not bolster the New Zealand Dollar for long. A number of Fed policymakers subsequently made rather hawkish comments, prompting markets to start pricing in a higher probability of the central bank raising interest rates before the end of the year. With risk appetite slumping sharply in response, the GBP NZD exchange rate climbed to a two-week high of 1.8127.
Support for the Pound strengthened on Monday morning thanks to a survey by accountancy firm EY, who noted that the majority of businesses within their sample did not seem to believe that the Brexit vote will have a particularly negative impact on them. As further evidence that the post-referendum fallout has not been overly severe, this encouraged Sterling to maintain its upside bias.
Heightened Fed Rate Hike Speculation Could Dampen NZD Outlook
Even so, with relatively thin trading volumes at this time of year the GBP NZD exchange rate could see a greater degree of changeability over the coming days. Investors remain concerned by the uncertainty surrounding the UK’s departure from the EU, something which is likely to remain a drag on the Pound for some time. Even if second quarter UK GDP proves bullish the reaction of Sterling could still be muted, given that the measure exclusively reflects the health of the pre-referendum economy.
Expectations are not high for the latest raft of New Zealand trade data, meanwhile, with forecasts being for a decline in exports matched with a sharp increase in imports. As this would not bode overly well for the outlook of the domestic economy the ‘Kiwi’ is expected to weaken in response. Additional pressure is likely ahead of Fed Chair Janet Yellen’s speech at the Jackson Hole Symposium, although the GBP NZD exchange rate could return to a downtrend if the odds of an imminent rate hike are diminished.