The latest Chinese trade data saw risk appetite fade ahead of last weekend, denting the New Zealand Dollar in the process. Disappointingly, exports were found to have contracted by -6.1% rather than the -3.8% forecast. This undermined confidence in the health of the world’s second largest economy, putting renewed pressure on commodity-correlated currencies as market bullishness faltered. While fears of a hard landing have been limited since the start of the year, this weaker showing nevertheless helped the GBP NZD exchange rate strengthen.
The Pound plunged across the board on Monday morning, though, responding to speculation that Theresa May’s first Brexit speech would adopt a harder line of rhetoric. Investors were spooked by the thought that the UK is on track to lose its membership of the single market and customs union, something which would lead to greater trade barriers and higher tariffs. This was not a particularly welcome prospect, particularly given concerns about the underlying vulnerability of the economy and the UK’s wide trade deficit.
Brexit Speech Boosted Pound Demand
Even so, Sterling was able to make a modest recovery on the back of December’s Consumer Price Index. Inflationary pressure was found to have risen further than forecast, climbing from 1.2% to 1.6% on the year, to offer the GBP EUR exchange rate a rallying point. Although higher inflation is likely to put pressure on wages and may limit consumer spending in the coming months, this was nevertheless seen as a positive result.
Investors are hopeful that higher inflation could prompt the Bank of England (BoE) to take a more hawkish view on monetary policy in the near future. While policymakers have previously pledged to look through any increase in inflation caused by the drop of the Pound, the swift progress towards the 2% target nevertheless boosted market confidence on Tuesday morning.
Contrary to expectations, Theresa May’s Brexit speech ultimately prompted the GBP NZD exchange rate to extend its gains further. While May confirmed that the government was not seeking to retain membership of the single market this failed to spook investors, who were instead reassured by the confirmation that parliament will vote on the final deal.
Risk Appetite to Weak Ahead of US Inauguration
Demand for the New Zealand Dollar could strengthen in response to December’s Manufacturing PMI, which could show a further uptick in sector growth. Any indications of robustness within the domestic economy would improve the appeal of the ‘Kiwi’, limiting the chances of the Reserve Bank of New Zealand (RBNZ) returning to an easing bias.
An improvement in the ANZ consumer confidence index could equally offer support to the antipodean currency, although general market volatility could offer a boost to the GBP NZD exchange rate. Risk appetite is expected to diminish ahead of the US inauguration, particularly if Trump’s economic plans remain unclear. Even so, if the US Dollar weakens in response to political developments this could give the ‘Kiwi’ some support ahead of the weekend.
Another uptick in average weekly earnings could help the Pound to extend its recent recovery further, even if the prospects for wage growth are not overly positive given the rise in domestic inflation. A solid raft of employment data would still ease concerns over the resilience of the economy in the short term, at least. However, if the labour market shows signs of weakening then the GBP NZD exchange rate could return to a downtrend.