Despite domestic data being generally lacking, the New Zealand Dollar nevertheless saw some volatility last week, fuelled by shifting market risk sentiment. An unexpected widening of the US trade deficit increased the appeal of the ‘Kiwi’, suggesting that the world’s largest economy is not in such a robust state as previously thought. This prompted investors to pile back into the higher-yielding New Zealand Dollar, particularly as commodity prices experienced a fresh rally.
The GBP NZD exchange rate was able to recover some ground ahead of the weekend, however, after the latest Nationwide house price index defied expectations of a moderate dip in growth to instead clock in at 4.5%. This counteracted the more negative BBA mortgage approvals figure, indicating greater strength within the domestic housing market. Although the signs remained mixed, this was enough to boost confidence in Sterling, in part thanks to the lower trading volumes of the post-Christmas period.
As China’s Manufacturing PMI fell short of forecasts in December the New Zealand Dollar got off to a slow start in 2017. Signs of weakness in the major importer did not encourage particular confidence in commodity-correlated currencies, particularly with the Federal Reserve looking set to raise interest rates multiple times over the course of the year. At this juncture investors consider the ‘Kiwi’ to be largely overvalued, despite the positive underlying fundamentals of the New Zealand economy. As a result, with market jitters mounting, the GBP NZD exchange rate was encouraged to trend higher.
Dip in Dairy Prices Boost GBP NZD Exchange Rate
Another positive sign for the UK economy came in the form of December’s Manufacturing PMI, which showed a surprise increase from 53.6 to 56.1. Although the details of the survey indicated that inflationary pressures continued building, this was not enough to hamper the buoyant Pound. Investors were encouraged to see that the manufacturing sector remained robust in spite of the uncertainty surrounding the outlook of the domestic economy, with this strong showing seeming to bode well for the corresponding Construction and Services PMIs.
In another negative sign for the ‘Kiwi’ the first GlobalDairyTrade auction of 2017 saw a -3.9% dip in prices. Given the importance of the dairy industry to the outlook of the New Zealand economy this disappointing result put further pressure on the antipodean currency. While it still seems unlikely that the Reserve Bank of New Zealand (RBNZ) will return to an easing bias in the future, especially if the ‘Kiwi’ continues to weaken on its own, the prospect continued to put a dampener on the mood of investors.
Hawkish Fed Minutes Likely to Weigh on New Zealand Dollar
Although fresh New Zealand data will remain in short supply in the coming week, the GBP NZD exchange rate is expected to see volatility in response to developments in the US. The minutes from the Federal Open Market Committee’s (FOMC) December policy meeting could prompt another wave of risk averse trading. If policymakers demonstrated greater willingness to raise interest rates at a faster pace the US Dollar could extend its bullish run, to the detriment of the New Zealand Dollar.
If the rest of the UK PMIs for December prove positive, the Pound could find more substantial support. Further signs of the economy’s robustness in the post-referendum world would improve the appeal of Sterling, despite the ongoing sense of uncertainty. On the other hand, if growth is found to have dipped at the end of the year the GBP NZD exchange rate may slump sharply.