Confidence in the New Zealand Dollar weakened sharply in the wake of the Reserve Bank of New Zealand (RBNZ) May policy meeting. Markets were caught off guard by the more cautious tone that the central bank adopted, undermining expectations that a return to monetary tightening could be on the cards. Governor Graeme Wheeler noted that inflation is likely to slow in the coming months and that monetary policy will remain loose for some time to come. As a result the GBP NZD exchange rate surged bullishly, climbing to its highest level since July 2016.
However, the Pound failed to hold onto all of its gains against the antipodean currency as Thursday’s Bank of England (BoE) meeting also disappointed investors. There had been hopes that a second policymaker might break ranks and join noted hawk Kristin Forbes in voting for an immediate interest rate hike. However, the general outlook of the Monetary Policy Committee (MPC) remained rather dovish, in spite of a somewhat optimistic note in the quarterly Inflation Report.
As the BoE based its revised economic forecasts on the UK having a ‘smooth’ Brexit, the chances of the central bank returning to a tightening bias appear to remain slim. Given the hard line of rhetoric that Theresa May continues to adopt (and the already soured nature of relations between UK and EU officials) the divorce looks set to be an acrimonious one. Naturally, this prospect limited the upside potential of Sterling.
Strong Retail Sales Shore up NZD
An unexpected uptick in New Zealand retail sales helped bolster the appeal of the ‘Kiwi’ at the start of the new week. As sales rose 1.5% on the quarter this added to the impression that the domestic economy got off to a solid start in 2017. Higher levels of consumer confidence and spending bode well for the outlook of the New Zealand economy, even if the mood of the RBNZ remains dovish.
The mood towards the commodity-correlated New Zealand Dollar was also shored up by the announcement of the new Chinese ‘Belt and Road’ initiative. China’s ambitious infrastructure spending pledge encouraged demand for higher-yielding assets, offering reassurance that the push for greater globalisation remains strong.
Could Higher UK Inflation Boost GBP?
Further pressure could be in store for the GBP NZD exchange rate if April’s UK consumer price index report fails to impress. While another solid uptick in inflationary pressure would not bode well for domestic consumers, a higher reading could offer the Pound a rallying point. If inflation shows signs of rising faster than the BoE’s current forecast this may prompt speculation that a more hawkish policy outlook could be in store. If the latest earnings data indicates a further slowing in wage growth, however, demand for Sterling could weaken.
If May’s ANZ consumer confidence index picks up then the ‘Kiwi’ may extend its recent gains further. Although the RBNZ has adopted a more dovish view any signs of stronger domestic sentiment could buoy demand for the New Zealand Dollar. On the other hand, if this or the latest credit card spending figures indicate that optimism is faltering, the GBP NZD exchange rate may find some measure of support.