The New Zealand Dollar saw some marked volatility in response to the shock result of the US presidential election, with the higher-risk asset initially slumping as a result of the unexpected Republican win. However, investors adjusted to the news of Donald Trump’s election relatively rapidly, allowing the ‘Kiwi’ to take back some of its initial losses in the following days. As Trump dialled down on some of his more inflammatory remarks markets were encouraged, hoping that he will be rather different in the Oval Office compared to the campaign trail.
Despite markets having largely priced in a November interest rate cut from the Reserve Bank of New Zealand (RBNZ) this did not prevent the ‘Kiwi’ from slumping sharply in response to the announcement. While policymakers offer strong indication that rates are likely to remain on hold for the foreseeable future markets were not reassured, in part thanks to the latest developments in the US. Should the Federal Reserve return to a more aggressive monetary tightening cycle this could force the RBNZ to act again, particularly if protectionist rhetoric looks set to damage the global economy.
US Election Results Prompted Pound Sterling Strength
Confidence in the Pound strengthened bullishly in response to commentary from the US, on the other hand. Given Donald Trump’s previous praise for the Brexit vote and words from a member of the President-Elect’s team the odds of a fast-tracked US-UK trade deal were boosted, something that naturally encouraged Sterling demand. Should the UK be able to secure a more rapid agreement with the US the negative implications of Brexit could be muted, offering the GBP NZD exchange rate further support.
Even so, market risk appetite recovered at the start of the new week, helping the New Zealand Dollar to regain some ground against its rival. Despite weakness showing in the latest raft of Chinese data this failed to dent the appeal of the commodity-correlated currency on Monday, with investors still primarily concerned with the fallout of the US elections.
Brexit and Trump Worries Predicted to Weigh on GBP NZD Exchange Rate
Although Trump’s promises of increased infrastructure investment and fiscal stimulus have encouraged markets, prompting a flight from government bonds into higher-yielding assets, this boost could soon begin to wear thin. There are many doubts as to the feasibility of the Trump economic plan, with increased protectionism and a wider US deficit likely to provoke worries further down the road. Crucially, though, the Federal Reserve is seen to be on track to raise interest rates in December, something which could see the GBP NZD exchange rate rally strongly.
Ahead of the Supreme Court hearing on the Article 50 case the Pound could remain under a certain amount of pressure, with the prospect of further Brexit-based uncertainty deterring investors. However, if it is ruled that Parliament has to have a say in the triggering of Article 50, and the wider exit procedure by extension, this could be seen as Pound-positive. Either way, the jittery mood of markets is likely to limit the upside potential of Sterling in the near future.
The GBP NZD exchange rate could trend lower on the back of Tuesday’s UK Consumer Price Index report, meanwhile. Forecasts point towards a further uptick in domestic inflationary pressure, which would point towards a faster squeeze in real wages as inflation is expected to spike in coming months. As the Bank of England (BoE) has expressed a willingness to look through rising inflation this is unlikely to boost the chances of a return to the monetary tightening cycle, limiting the appeal of the Pound.