In the wake of a relatively dovish Reserve Bank of New Zealand (RBNZ) policy meeting the Pound New Zealand Dollar exchange rate trended sharply higher.
Although the central bank left interest rates unchanged at 1.75% policymakers expressed some concern over the relative strength of the ‘Kiwi’, which has been weighing on domestic growth and inflation.
As Rob Carnell, Chief Economist at ING, noted:
‘This was the main difference in the statement since the last one in May, when the RBNZ indicated its satisfaction with the decline in the trade weighted NZD since February. But unless the RBNZ decides to hint at more active measures, i.e. cutting rates, and unless the US Fed decides to speed up its tightening (seems unlikely) it is hard to see where this NZD weakness will come from.’
This dovish message was still enough to dent the New Zealand Dollar overnight, particularly as the general sense of market risk aversion picked up further.
Worries over the escalating tensions between the US and North Korea weighed heavily on the risk-sensitive ‘Kiwi, with investors favouring safe-haven assets instead.
The mood towards the antipodean currency could pick up a little if July’s food prices data points towards an uptick in inflationary pressure, though.
If prices edge higher on the month this could encourage some confidence in the New Zealand Dollar, especially if investors increasingly dismiss the prospect of any policy easing from the RBNZ.
Widening Trade Deficit Dents Pound Outlook
As the latest raft of UK trade and production data proved somewhat mixed this prevented the GBP NZD exchange rate from extending its gains further on Thursday morning.
While industrial and manufacturing output both showed a solid rebound in June this was counterbalanced by an unexpected widening of the visible trade deficit.
This widening of the deficit highlighted the continued vulnerability of the UK economy, raising concerns over the prospect of Brexit negotiations ending with a hard divorce.
Altogether this did not paint the most encouraging picture of the domestic outlook, removing further support from Sterling.
Further volatility is likely in store for the GBP NZD exchange rate next week with the release of July’s UK consumer price index report.
Investors are keen to gauge whether inflationary pressure in the UK is continuing to accelerate, with any uptick in headline inflation likely to boost demand for the Pound.
Even though the Bank of England (BoE) looks increasingly unlikely to return to a monetary tightening cycle any time soon a higher inflation rate could still encourage bets of greater hawkishness.
On the other hand, if the consumer price index instead points towards an easing in price pressures this could weigh heavily on the GBP NZD exchange rate.