Pound to New Zealand Dollar Exchange Rate's Bullish Run to Extend as NZD Weakened by "Verbal Jawboning by RBNZ"

September 3, 2017 - Written by John Cameron

STORY LINK Pound to New Zealand Dollar Exchange Rate's Bullish Run to Extend as NZD Weakened by "Verbal Jawboning by RBNZ"

The pound to New Zealand dollar exchange rate has seen an impressive rally, taking the pair to 1.80991 ahead of the markets re-opening today.

Even though Brexit-based worries mounted in the wake of another inconclusive round of negotiations this was not enough to prevent GBP/NZD climbing to a fresh three-month high.

The pairing largely benefitted from the relative softness of the New Zealand Dollar, which clocked its fifth consecutive week of losses.

Investors were spooked by the latest New Zealand opinion poll which placed Labour in the lead for the first time in twelve years, sparking greater speculation over the outcome of the upcoming election.

The prospect of a significant shift in the domestic political landscape encouraged a sustained round of NZD selling, especially as the wider sense of market risk appetite remained rather muted in nature.

Even so, analysts at ANZ noted:

‘But we wouldn’t overplay politics given how centrist the local political scene is by global comparison, the decent macro backdrop and global cross-currents. Technically, the NZD has broken lower and that argues for caution, but we don’t think it’s out for the count just yet.’

Strong Services PMI Could Increase GBP Confidence

Although the UK manufacturing PMI unexpectedly strengthened from 55.3 to 56.9 in August this failed to particularly shore up the Pound.

While the sector continued to demonstrate a strong level of growth, in spite of the persistent uncertainty of Brexit, confidence in the domestic outlook remains somewhat limited.

However, a similarly strong showing from the corresponding services PMI could see the GBP NZD exchange rate extending its gains bullishly on Tuesday.

As the service sector accounts for more than three quarters of economic activity in the UK a fresh uptick here would bode well for the health of the economy as a whole.

If the economy continues to shake off the negative impact of Brexit-based market jitters and the relative weakness of the Pound this could encourage renewed speculation over the policy outlook of the Bank of England (BoE).

Greater evidence that the UK economy has rebounded in the third quarter may give policymakers more incentive to return to a hawkish stance on interest rates.

Nevertheless, as James Smith, Developed Markets Economist at ING, noted in the wake of the bullish manufacturing PMI:

‘For the Bank of England, this all means the rebalancing of the economy away from weakening consumption to other areas doesn't appear to be materialising. With overall economic momentum slowing and signs of domestically generated inflation proving hard to find, we think the first BoE rate hike is still some way off.’

Any softening in domestic economic activity is likely to leave the Pound vulnerable to further downside pressure, especially if worries over Brexit do not start to ease.

RBNZ Jawboning Leaves NZD Exposed to Downside Pressure

As election jitters continue to mount in the coming weeks the New Zealand Dollar may struggle to find any particular support, in spite of the relative strength of domestic data.

Markets are also likely to continue discounting the prospect of any return to hawkishness from the Reserve Bank of New Zealand (RBNZ) in the near term, potentially keeping the GBP NZD exchange rate on a stronger footing.

Viraj Patel, foreign exchange strategist at ING, noted:

‘The Reserve Bank of New Zealand has been saying no thanks to a strong NZD for a while now and ramped up its jawboning attempts in August by dropping the threat of intervention into the mix. While the threat of FX intervention remains non-credible at this stage – as the costs of an RBNZ rate cut in terms financial stability risks outweigh the benefits of a weaker NZD – we attribute part of the kiwi's recent underperformance to the verbal jawboning by RBNZ officials.’

With little in the way of New Zealand data due for release this week the potential for a ‘Kiwi’ rally will be relatively minimal, assuming that there is no sudden surge in market risk appetite.

Even so, if the threat of RBNZ intervention loses some of its potency this could give the New Zealand Dollar some breathing room and space to rally.

International Money Transfer? Ask our resident FX expert a money transfer question or try John's new, free, no-obligation personal service! ,where he helps every step of the way, ensuring you get the best exchange rates on your currency requirements.

TAGS: Currency Predictions New Zealand Dollar Forecasts Pound Ne Forecasts