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TorFX

New Zealand Dollar (NZD) Exchange Rate Rallies as RBNZ Hints at Monetary Tightening

New Zealand Dollars

The Pound to New Zealand Dollar exchange rate (GBP/NZD) sunk by around -0.9 cents last night in response to the Reserve Bank of New Zealand’s latest interest rate decision and policy statement. The RBNZ struck a surprisingly hawkish tone during the statement as the benchmark interest rate was maintained at the current level of 2.50%.

GBP/NZD declined from 1.9290 to 1.9200 within an hour of the Central Bank statement as traders raised their forecasts for interest rate hikes in the next twelve months from 39 basis points to 54 bps. The ‘Kiwi’ Dollar rallied as RBNZ Governor Graeme Wheeler said that economic prospects are picking up across New Zealand and warned that housing market growth could potentially impact price stability in the Antipodean nation:

“Growth in the New Zealand economy is picking up and, although uneven, is becoming more widespread across sectors”.

New Zealand Dollar traders were particularly excited by Governor Wheeler’s remark that a removal of monetary stimulus “will likely be needed in the future”, which boosted hopes that the high-beta currency will see higher yields at some point on the horizon. It was also interesting to witness the way that Wheeler toned down his reproach of the historically strong ‘Kiwi’ Dollar. The RBNZ man’s indictment against the New Zealand Dollar was softened from “overvalued” in June, to “restricts export earnings and encourages demand for imports” in July; the subtle change in rhetoric adds to the suggestion that the Central Bank is moving away from its easing cycle and closer to another round of interest rate hikes.

TorFX

In response to the surprisingly hawkish Reserve Bank of New Zealand statement the New Zealand Dollar performed admirably well against its major currency rivals: striking a near-5-year high of 0.8725 against the Australian Dollar (NZD/AUD); rising by 0.5 cents against the US Dollar (NZD/USD); rallying 0.4 cents against the Japanese Yen (NZD/JPY); climbing 0.3 cents against the Euro (NZD/EUR); and advancing 0.3 cents against the Canadian Dollar (NZD/CAD).

The ‘Kiwi’s’ gains could have been even more impressive were it not for a risk-destroying Chinese Manufacturing PMI earlier in the day. The latest HSBC Chinese Purchasing Managers Index printed at 47.7 in July, marking the third straight month of contraction for the hugely important Chinese Manufacturing Industry. All in all the Pound to New Zealand Dollar exchange rate (GBP/NZD) finished for the day at 1.9210, within a few pips of the 1.9207 that it begun, as the bearish Chinese news was wiped out by the hawkish RBNZ policy statement.

It is possible that Sterling could come into demand later this morning if the UK Q2 GDP report prints inline with economists’ expectations of 0.6%. Strong Service Sector data and robust Retail Sales results suggest that British economic output could well have accelerated from the 0.3% level that it reached in the first quarter of 2013. Because of the highly volatile nature of the New Zealand Dollar it is possible that a positive GDP result could lead to extended GBP/NZD rallies. With this in mind 1.1940 is easily feasible by the end of play this evening.