December’s raft of New Zealand trade data proved encouraging for the ‘Kiwi’, showing that exports had risen further than forecast on the month to help narrow the trade deficit from -746 million to -41 million. This prompted greater confidence in the outlook of the domestic economy, seeming to lower the likelihood of the Reserve Bank of New Zealand (RBNZ) opting to return to an easing bias in the near future.
The GBP NZD exchange rate was prompted to weaken further as Parliament voted in favour of the government’s Article 50 bill, continuing the UK down its path towards exiting the EU. While a number of amendments have been tabled to be debated in the coming week, fears of a hard Brexit remain high.
However, New Zealand’s labour market data undermined the appeal of the antipodean currency on Tuesday evening. Contrary to expectations of a slight dip from 4.9% to 4.8% the fourth quarter unemployment rate was found to have surged to 5.2%. While this unexpected increase was largely driven by a higher participation rate – which showed an increase in the number of economically active individuals – the disappointing showing was coupled with a contraction in average hourly earnings. Weaker wage growth does not bode well for the wider economy, pointing towards a reduction in consumer spending and optimism.
Dovish BoE Weighed on Pound Sterling Demand
Even so, the Pound struggled to hold onto any particular gains against the New Zealand Dollar in the wake of the Bank of England’s (BoE) policy meeting and Inflation Report. Although the central bank raised its growth forecasts in response to the more limited negative impact that Brexit has had on the economy to date this was not enough to boost Sterling. Instead investors were deterred by Governor Mark Carney’s repeated comment that the next move in interest rates could be either way, reaffirming the neutral outlook of the BoE.
As the UK services PMI showed a significant fall, weakening from 56.2 to 54.5 in January, the GBP NZD exchange rate came under further pressure ahead of the weekend. Given that the service sector accounts for the majority of the UK’s economic activity, this weakness drove the Pound to extend its slump. All three UK PMIs pointed towards a sharp increase in domestic inflationary pressure which is likely to be passed through into the wider economy and erode consumer spending, assuming that wages consistently fail to keep pace.
Will RBNZ Prove Hawkish This Week?
Confidence in the ‘Kiwi’ weakened ahead of the RBNZ’s latest two-year inflation expectation report, which could offer some indication as to the outlook of the central bank. If policymakers see inflation continuing to progress towards its 2% target range the GBP NZD exchange rate is likely to return to a downtrend. However, if there is any indication that the RBNZ is less optimistic with regards to the economic outlook the New Zealand Dollar may struggle to find support.
Markets will not have to wait long to get greater clarity over the central bank’s current stance on monetary policy, however, with the first RBNZ meeting of 2017 falling on Wednesday. The antipodean currency is expected to see greater volatility in response to commentary from Governor Graeme Wheeler. If Wheeler proves more hawkish in tone the GBP NZD exchange rate may weaken significantly.
Sterling could be boosted by December’s raft of UK trade and production data, meanwhile, if the figures suggest a greater degree of resilience within the economy. Expectations are for the trade deficit to have narrowed from -12.1 billion to -11.4 billion; a modest improvement which could ease worries over the UK’s outlook. Nevertheless, with manufacturing and industrial production forecast to have weakened substantially on the month and Brexit jitters unlikely to have abated, the Pound is likely to remain relatively vulnerable.