A sharp decline in New Zealand manufacturing activity in the third quarter delivered a blow to the ‘Kiwi’ by undermining confidence in the health of the domestic economy. With risk appetite generally weakened thanks to high expectations of a Federal Reserve interest rate hike, this saw the Pound New Zealand Dollar exchange rate trending higher.
As economic activity shows signs of weakening, investors have been inclined to speculate over the policy outlook of the Reserve Bank of New Zealand (RBNZ). Poor domestic data could increase the odds of the RBNZ lowering interest rates further in the coming year, particularly if inflationary pressure fails to pick up. Demand for the New Zealand Dollar consequently weakened when the Manufacturing PMI also showed a decline on the month.
Pound Dented by Lowered BoE Inflation Forecasts
After the Fed ultimately opted to raise interest rates by 25bpt at its December policy meeting the GBP NZD exchange rate saw an additional boost. However, the impact of the decision was rather limited thanks to market expectations, with the ‘Kiwi’ having already shed value in anticipation of the move. Even so, with Fed policymakers adopting a more hawkish tone with regards to further interest rate hikes in 2017, the meeting still weighed on the New Zealand Dollar.
There was no surprise from the Bank of England’s (BoE) final policy meeting of the year, with the Monetary Policy Committee (MPC) choosing to leave rates on hold once again. Although the minutes reiterated the view that the next move on interest rates is as likely to be up as it is down, this was not enough to stop the Pound softening in response.
Investors were more concerned by the BoE’s lowering of its inflation forecasts for 2017, as policymakers noted that Sterling had already recovered significant ground from its post-referendum lows. As Governor Mark Carney had previously indicated that some inflationary uptick from the Pound’s rise could be looked through this seemed to reduce the likelihood of interest rates being raised in the near future. This naturally discouraged investors from piling into the Pound, leaving the GBP NZD exchange rate on a softer footing.
Weaker New Zealand GDP to Boost GBP NZD Exchange Rate
Confidence in the Pound is likely to falter in response to Wednesday’s public sector net borrowing figure, which is expected to show a sharp increase in new government debt. Forecasts point towards a headline figure of 11.6 billion, something which would not encourage particular confidence in the outlook of the UK economy. Given the uncertain nature of the UK’s future outside of the EU, any widening of the domestic trade deficit is likely to discourage demand for the Pound.
Volatility for the GBP NZD exchange rate should be expected in response to New Zealand’s third quarter Gross Domestic Product report. Investors anticipate a slight dip in growth from 3.6% to 3.4%, a weakening which could nevertheless weigh heavily on the antipodean currency. Any loss of momentum could be seen as further incentive for the RBNZ to return to monetary easing, a prospect which would not be New Zealand Dollar positive.
Risk aversion could limit the appeal of the ‘Kiwi’ towards the close of the year, although it could find a rallying point on November’s US durable goods orders data. Orders are expected to have contracted by -4.5% on the month, which could dampen the strength of the US Dollar despite the high expectations of further Fed tightening. While the underlying mood of markets is likely to remain bearish, a weaker result here could still see the GBP NZD exchange rate trending lower in the near term.