Confidence in the ‘Kiwi’ weakened markedly in the wake of disappointing New Zealand manufacturing PMI and retail sales data. As the manufacturing index slipped from 54.2 to 51.6 in January this somewhat undermined the resilient outlook of the domestic economy. Coupled with a general decrease in market risk appetite this saw the New Zealand Dollar slump ahead of the weekend.
However, the GBP NZD exchange rate came under renewed pressure as UK retail sales were found to have unexpectedly contracted on the month. This offered evidence that consumer confidence started to falter in the wake of the Brexit vote. With inflationary pressure already rising and wage growth slowing, the spending power of consumers is likely to be increasingly squeezed in coming months. Given that resilient consumer demand has been one of the key drivers of the economy in the aftermath of the referendum, this prospect does not bode well for the outlook of the Pound.
GBP NZD Advanced Despite Strong NZ Services PMI
January’s New Zealand services PMI proved rather more encouraging to markets, rising to a bullish 59.5 and signalling a continued trend of solid growth within the sector. This demonstration of economic resilience encouraged greater demand for the antipodean currency, particularly as the strength of the US Dollar faltered. Signs of resilient growth are seen to limit the incentive for the Reserve Bank of New Zealand (RBNZ) to consider any policy easing, to the benefit of the ‘Kiwi’.
An unexpected improvement in the CBI industrial trends report for February set the Pound on a bullish run on Monday morning, with businesses continuing to shrug off the uncertainty of Brexit in spite of rising inflationary pressure. While orders rose to their highest level in two years, however, the survey also pointed towards further price increases to come. Even so, the GBP NZD exchange rate extended its gains, rallying strongly and reversing much of the last week’s losses.
Hawkish Fed Minutes Forecast to Dent NZD
No change is expected from the second estimate of the fourth quarter UK gross domestic product, which could encourage continued demand for the Pound. Any fresh indication that the negative impact of Brexit has been limited would give markets further cause for confidence in Sterling, despite the weakness of more recent ecostats. If the report shows a strong rebound in exports in the final quarter of 2016 GBP exchange rates could be boosted still higher.
New Zealand credit card spending figures could offer a fresh rallying point to the ‘Kiwi’, meanwhile, if consumers are found to have continued spending and fuelling economic activity. While a stronger showing could raise concerns about levels of debt within the domestic economy, the GBP NZD exchange rate is nevertheless likely to trend lower. On the other hand, any signs of weakening sentiment may weigh heavily on the antipodean currency.
Further volatility for the risk-sensitive New Zealand Dollar is also to be expected with the release of the Federal Reserve’s February meeting minutes. While the odds of a March interest rate hike are already high, any particularly hawkish commentary in the minutes could see the US Dollar strengthen further. Any resulting decline in risk appetite would damage the appeal of the ‘Kiwi’, giving the GBP NZD exchange rate further support.