Another positive result at the latest GlobalDairyTrade offered a boost to the ‘Kiwi’ by encouraging greater confidence in the domestic dairy industry. Given the significant contribution made by the dairy industry to New Zealand’s economy, the modest increase in prices was well received. Even so, market preference for the Australian Dollar and a general increase in risk aversion limited the losses of the GBP NZD exchange rate on Tuesday.
After softening in response to disappointing manufacturing and construction PMIs Sterling found a rallying point mid-week on the back of the March services PMI. Contrary to forecasts, the index strengthened from 53.3 to 55.0 as the sector continued expanding at a solid pace. This eased some of the concerns surrounding the UK economy, even though the details of the report highlighted the ongoing build-up in inflationary pressure.
Hawkish Fed Outlook Boosted GBP NZD Exchange Rate
The New Zealand Dollar came under increased pressure after March’s Federal Reserve meeting minutes proved more hawkish than markets had anticipated. Policymakers engaged in an extended discussion over the matter of the Fed’s balance sheet, suggesting that monetary policy is likely to tighten more rapidly than previously thought. As a result the appeal of the higher-yielding ‘Kiwi’ weakened, with the currency weighed down by a bullish US Dollar.
An increasing sense of geopolitical tension also limited demand for the New Zealand Dollar, with investors instead piling back into safe-haven assets. If the harsh rhetoric between the US and Russia intensifies further the GBP NZD exchange rate is likely to benefit.
However, confidence in the Pound weakened ahead of the weekend thanks to another disappointing raft of domestic data. In a discouraging sign for the domestic housing market, the Halifax house price index failed to pick up on the month, signalling a lower level of demand. Contractions in manufacturing and construction output also diminished demand for Sterling, underlining worries that the domestic economy is starting to slow in response to Brexit-based uncertainty.
Rising NZ Food Prices Could Boost New Zealand Dollar Demand
While the GBP NZD exchange rate returned to an uptrend at the start of the week, the pairing may struggle to hold onto its recovery for long. Volatility is expected in response to March’s UK consumer price index report, which is forecast to show a softening of inflationary pressure on the month. This could lower the odds of the Bank of England (BoE) returning to a hawkish bias in the near future, as policymakers have pledged to look through some degree of inflation resulting from Brexit-based uncertainty and Sterling weakness.
Inflation data from New Zealand could influence the appeal of the ‘Kiwi’, meanwhile. Markets are hoping to see an increase in food prices on the month; a result which would give the Reserve Bank of New Zealand (RBNZ) greater cause for confidence. If the manufacturing PMI also points towards economic resilience this could encourage policymakers to adopt a more optimistic outlook, boosting the mood towards the New Zealand Dollar. Any disappointment, however, could leave the ‘Kiwi’ floundering in the absence of any particular support.