- Pound boosted by bullish manufacturing data – Confidence in post-referendum UK economy improved
- Lower odds of imminent Fed rate hike benefitted ‘Kiwi’ – NZD trended higher as risk appetite strengthened
- UK Services PMI result critical to GBP/NZD exchange rate outlook – Stronger showing could diminish chances of additional BoE rate cut
- New Zealand Dollar forecast to remain biased to upside – Market pricing implies low odds of September RBNZ action
With investors weighing up the likelihood of the BoE and the RBNZ cutting interest rates further at their next policy meetings volatility is expected for the GBP NZD exchange rate in the coming weeks.
Pound (GBP) Demand Boosted by Unexpectedly Strong Manufacturing PMI Recovery
The Pound (GBP) has seen some significant movement in recent days, with markets reacting to the UK Manufacturing and Construction PMIs for August. Both showed a stronger-than-expected improvement on the month, appearing to shake off much of the post-referendum anxiety that had weighed on the measures in July. Although the Pound to New Zealand Dollar (GBP NZD) exchange rate made some bullish gains on the back of the optimistic manufacturing data, however, the pairing was unable to maintain its momentum ahead of the weekend. As the construction sector remained in contraction territory investors were encouraged to engage in a round of profit taking against Sterling, driving the currency back down against its rivals.
Risk appetite surged, meanwhile, thanks to a weaker US Non-Farm Payrolls report. The Unemployment Rate held steady at 4.9% in August rather than dropping to 4.8% as expected, indicating that the labour market had failed to tighten in line with forecasts. This saw the odds of an imminent Federal Reserve interest rate rise diminish significantly, weakening the US Dollar (USD) and boosting higher-yielding currencies such as the New Zealand Dollar (NZD). Lower odds of a 2016 interest rate hike from the Fed could continue to offer support to the ‘Kiwi’ for some days to come.
GBP NZD Exchange Rate Volatility Forecast on UK Services PMI
In the near term the Pound is likely to see volatility in response to the August Services PMI, given the significant portion of economic activity which the service sector accounts for. If the index shows a similar recovery to the other two PMIs then the GBP/NZD exchange rate can be expected to return to a bullish run. Providing the initial negative impact of the Brexit vote is found to have diminished investors are likely to adopt a more optimistic outlook on the Pound. A stronger showing across all three sectors would suggest that the economy is unlikely to have fallen into recession in the wake of the referendum, something that could push demand for Sterling higher.
Robust data could bode well for the Bank of England’s (BoE) September policy meeting, reducing the odds of policymakers maintaining their dovish bias. Given the extensive nature of the easing measures already deployed by the BoE this would encourage markets to buy back into Sterling, suggesting that it could have hit a temporary floor. This would offer the GBP/NZD exchange rate support to the upside, with Lee Hardman, currency analyst at MUFG, having noted:
‘If the economy continues to hold up better than expected, the BoE is unlikely to follow through with their current plans to lower rates again to close to zero by year end. In these circumstances, we still see scope for the pound to rebound further in the near-term.’
New Zealand Dollar (NZD) Forecast to Trend Higher as RBNZ to Hold Rates in September
Monetary policy speculation will also remain a key driver of the ‘Kiwi’ for the foreseeable future, with markets continuing to bet on the odds of when the Reserve Bank of New Zealand (RBNZ) will next cut interest rates. Weaker domestic data in recent weeks has seen the pricing for a 2016 rate cut increase dramatically, with investors and policymakers taking a less optimistic view of the New Zealand economy. Even so, the antipodean currency has shown a tendency towards resilience, with the still relatively high rates continuing to attract investors to the ‘Kiwi’.
While greater volatility seems likely around the RBNZ’s policy meeting on the 21st September this could ultimately prove to be a fleeting boost for the GBP/NZD exchange rate. Imre Speizer, research analyst at Westpac, noted that:
‘September is considered very unlikely (because the RBNZ said it favours moving on MPS dates, not at interim meetings) at only 13% priced. That’s not to say September will be a trivial event for markets – the guidance in the one page press release will be closely examined for any signs of a shift from the tone of August’s guidance.’
If markets are proven correct in discounting the chances of an imminent rate cut then the New Zealand Dollar is likely to continue making strong gains across the board. However, a lack of action here would not necessarily diminish the prospect of the RBNZ easing policy before the end of the year. Any weakening in market risk appetite could help to shore up the GBP/NZD exchange rate in spite of this, particularly if investors continue to bet on the Fed returning to its monetary tightening cycle in the near future.
Current GBP, NZD Exchange Rates
At the time of writing, the Pound to New Zealand Dollar (GBP NZD) exchange rate was trending higher at 1.8252, while the New Zealand Dollar to Pound (NZD GBP) pairing was on a downtrend in the region of 0.5477.
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