Worse-than-expected second-quarter GDP figures from the UK saw the Pound Sterling to New Zealand Dollar exchange rate slump on Friday.
GBP/NZD fell -0.5% to trade around NZ$1.8501 as the end of the week’s trading drew to a close.
GDP Revision and Brexit Uncertainty Fail to Stop GBP Ending Week above Opening Levels
Markets were still digesting the implications of Theresa May’s Brexit speech the previous Friday when last week’s trading session began again.
The added threat of a trade dispute with the US and a downwards revision to year-on-year GDP in the second quarter further weighed on Pound Sterling exchange rates.
However, an improving US monetary policy outlook weighed on market risk sentiment, helping to keep the Pound on strong form for most of the week.
NZD had started the week on a sour note after the trade balance figures released late on Monday showed an even larger-than-expected deficit during August.
Worse-than-expected export volumes and higher-than-expected import volumes saw July’s NZ$98 million surplus collapse into a –NZ$1.23 billion deficit, against expectations of a –NZ$825 million shortfall.
The New Zealand Dollar was softened further midweek by the latest Reserve Bank of New Zealand (RBNZ) monetary policy meeting.
The board left interest rates unchanged and cut its growth forecasts.
Markets were initially cheered that Acting Governor Grant Spencer seemed less concerned by the strength of NZD exchange rates than his predecessor Graeme Wheeler had, but later the weak outlook for interest rates weighed on the New Zealand Dollar.
In a client note, ANZ commented; ‘Our bias is still that the next rate move will be a hike, probably from late next year, a view very conditional on wages picking up, the NZD falling and fiscal policy being more expansionary.’
UK PMIs in Focus; Will Pound be Supported by Signs of Economic Resilience?
It’s time for the final preliminary round of PMIs for the third quarter to be released this week.
Tomorrow kicks off with the manufacturing index, which is forecast to weaken slightly. This is unlikely to cause much concern in the currency markets, as the index would remain at a very favourable level, showing that the sector continues to grow at a brisk pace.
Tuesday’s construction index release could be somewhat more perturbing, however, given that it is predicted to inch down to 50.8, leaving it under one point away from entering contraction territory.
Markets would be relieved if Wednesday’s services PMI holds steady at 53.2 as expected, although an uptick in activity will be needed if the economy is to convincingly rebound from the weakness seen in the first half of the year.
As always, there are likely to be developments on the political spectrum that could further unsettle the Pound this week.
The trade dispute between Bombardier and Boeing is likely to continue for some time and, if the UK is discussing reciprocal tariffs it would seem to be only a matter of time before President Donald Trump or one of his officials wades into the fray.
There could be more comments and developments related to the pace of Brexit negotiations as well to keep the Pound volatile.
Will Dairy Prices or NZ Political Unease Weigh on New Zealand Dollar This Week?
The most high-profile event on the New Zealand data calendar this week will be the Global Dairy Trade auction, the results of which will be announced on Tuesday.
Should the average winning price of milk have risen again, the New Zealand Dollar will find itself supported higher.
The rest of the week’s data – Monday’s QV house prices and ANZ job advertisements and Tuesday’s ANZ commodity prices report – are all likely to have a minor impact if at all.
As well as developments on the data calendar, the continuing fallout from the recent General Election will remain a drag on the New Zealand Dollar, as will expectations that the Reserve Bank of New Zealand (RBNZ) will keep interest rates frozen for some time to come.
The National Party and Labour are both attempting to form coalitions with minor parties in the election; as the side with the largest share of the ballots the Nationals get to go first, but if they cannot secure the backing of other parties then it looks like New Zealand will end up with a Labour-led coalition.
This would undermine NZD exchange rates as markets tend to view right-wing governments as better economic stewards, so could fear that Labour’s economic policies may jeopardise the already flimsy odds of an interest rate hike in the near or medium-term.