After the government’s Article 50 bill received parliamentary approval, passing without amendment, the GBP NZD exchange rate weakened. While the move eliminated some of the uncertainty surrounding Theresa May’s Brexit timetable, Sterling was weighed down by worries over the potential outcome of negotiations. Scottish First Minister Nicola Sturgeon was quick to call for a second independence referendum, raising the prospect of a break-up of the UK.
Meanwhile, confidence in the outlook of the New Zealand economy was dented by the disappointing nature of the nation’s fourth quarter gross domestic product report. Growth was found to have slowed from 0.8% to 0.4% on the quarter, falling short of expectations and putting pressure on the ‘Kiwi’. This sign of a less robust economy prompted speculation that the Reserve Bank of New Zealand (RBNZ) could take a more dovish view on monetary policy.
The appeal of the risk-sensitive New Zealand Dollar soon recovered, however, thanks to the Federal Reserve’s March policy meeting. Markets had expected the Fed to signal a more aggressive pace of tightening alongside its interest rate hike, leading to disappointment when policymakers’ forecasts remained unchanged. This prompted the US Dollar to weaken sharply, pushing up the appeal of higher-yielding assets such as the ‘Kiwi’.
Less Neutral BoE Boosted GBP NZD
GBP exchange rates surged across the board on Thursday, after the Bank of England (BoE) policy meeting proved less neutral than expected. Known hawk Kristin Forbes made the surprise move of voting for a 25bpt interest rate hike, splitting what was forecast to be a unanimous vote to leave rates on hold. This overshadowed the more dovish elements of the meeting minutes, encouraging investors to pile back into the Pound.
A solid uptick in New Zealand’s manufacturing PMI helped boost the ‘Kiwi’ ahead of the weekend. As the measure rose from 52.2 to 55.2 on the month this pointed towards the sector maintaining strong levels of growth. This offered some reassurance in the outlook of the wider economy, particularly as risk appetite remained generally heightened.
RBNZ Expected to Make No Change at March Meeting
Volatility is expected for the GBP NZD exchange rate in response to February’s UK consumer price index report. Inflation data remains one of the key factors in determining the outlook of the BoE, even though the central bank has repeatedly stated its willingness to look through some degree of post-referendum inflationary pressure. Forecasts point towards another sharp increase in inflation, though, which could encourage speculation that the BoE could adopt a tightening bias sooner rather than later.
Also in focus this week will be the RBNZ interest rate decision, although there is no expectation for there to be any change in policy at this stage. However, the New Zealand Dollar could slump sharply if policymakers are seen to be adopting a more cautious outlook. Conversely, should the RBNZ express greater confidence in the resilience of the domestic economy, the GBP NZD exchange rate could trend lower.
Hopes are higher for the latest New Zealand trade data, with the trade balance expected to have recovered strongly from January’s -285 million deficit. Further signs of strength within the economy would give investors in the antipodean currency cause for confidence, particularly if markets maintain a bullish view on risk-sensitive assets. Any further softness in the US Dollar could also benefit the ‘Kiwi’ in the near term.