The Pound to New Zealand Dollar exchange rate (GBP/NZD) declined by around -2.0 cents last night as investors reacted to a surprisingly resilient New Zealand Consumer Price Index print.
With NZ CPI rising from 1.4% to 1.6% in the fourth quarter, confounding expectations of 1.5%, traders speculated that the Reserve Bank of New Zealand could hike interest rates as early as January.
With inflation rising at a faster rate than the RBNZ anticipated, business confidence soaring to a 20-year high and house prices surging, the situation in New Zealand took a tangible turn for the better during the fourth quarter. This uptick in economic conditions corroborates Governor Graeme Wheeler’s view from December that rate increases “will likely be required in 2014”.
The Reserve Bank of New Zealand meets next on January 30th, but the majority of markets do not foresee a modification to the Bank’s 2.5% overnight cash rate until March. The Central Bank has previously stated that it intends to raise rates by around 225 basis points over the next two years, which is likely to bolster demand for the ‘Kiwi’ over that time period.
The Pound is currently 7.0 cents stronger against the New Zealand Dollar than it was this time last year, however, demand for Sterling could wane over the next few months if speculative traders feel that NZD’s increasingly high yield differential makes it a better destination for investments.
It will be interesting to see how investors react if this Wednesday’s UK Unemployment Rate comes in stronger-than-anticipated. The headline jobless figure is predicted to fall from 7.4% to 7.3%, but any steeper decline would likely lead to heightened Bank of England rate hike speculation.
With the Federal Reserve keen to wind down its risk-boosting QE3 scheme, Chinese GDP printing at its joint lowest level for fourteen years and Australian economic output struggling to cope with the transition following the decade-long mining boon, the New Zealand Dollar’s status as a high-risk currency could come into play. With a host of risks present within the global economy and within New Zealand’s two largest trading partners, it is possible that GBP/NZD could continue to appreciate even when the RBNZ embarks upon its tightening cycle.
This, of course, relies on UK growth continuing at current or better rates and on British Unemployment falling to the BoE’s 7.0% threshold for discussing rate rises sooner rather than later.
There are a lot of ‘ifs’ and ‘buts’ to consider with regards to the Sterling to New Zealand Dollar exchange rate (GBP/NZD), however, the most likely outcome is that we will see the ‘Kiwi’ Dollar appreciate steadily against the Pound throughout the year.
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