AUD NZD Exchange Rate Regains Ground as New Zealand Business Confidence Falls

March 28, 2018 - Written by Tim Boyer

STORY LINK AUD NZD Exchange Rate Regains Ground as New Zealand Business Confidence Falls

While the ANZ New Zealand activity outlook index for March pushed higher on the month this was not enough to dent the Australian Dollar New Zealand Dollar (AUD/NZD) exchange rate.

Investors were not overly impressed to find that the accompanying ANZ business confidence index had continued to decline, suggesting that the faith in the domestic economy remains rather limited.

As market risk appetite was still muted, thanks to lingering worries over trade relations between the US and China, the New Zealand Dollar was rather lacking in support on Wednesday.

Even in the absence of any fresh domestic data the Australian Dollar was able to make some headway against many of the majors, recovering ground from its previous declines.

The continued bullishness of the US Dollar was not enough to keep AUD exchange rates under pressure at this juncture.

Lack of Confidence in New Zealand Economy Limits NZD Exchange Rate Potential

Confidence in the underlying health of the New Zealand economy looks rather lacking at present, giving investors reason to sell out of the risk-sensitive New Zealand Dollar.

Sharon Zollner, Chief Economist at ANZ, commented:

‘The economy is certainly not crawling, but it’s hardly gliding along. This far into the cycle it is naturally hard to accelerate. But while sectors of the economy such as housing and construction may be tiring, record-high terms of trade and a positive outlook for incomes are providing helpful buoyancy.’

Unless the domestic economy can muster some greater signs of acceleration the appeal of the ‘Kiwi’ is unlikely to improve in the near term.

Tonight’s building permits figure is unlikely to offer NZD exchange rates any particular rallying point, meanwhile, as the domestic housing market remains in a state of relative sluggishness.

If there is a solid rise in building permits on the month, however, the AUD/NZD exchange rate could see some of its gains reversed.

Speculation over the future policy outlook of the Reserve Bank of New Zealand (RBNZ) has also come back into focus this week after the appointment of new Governor Adrian Orr.

With the RBNZ’s mandate revised to encompass employment conditions as well as inflation there are naturally concerns over what this could mean for the course of domestic interest rates.

As Jane Foley, Senior FX Strategist at Rabobank, noted:

‘The introduction of a dual mandate is not the only change afoot at the RBNZ. A bill will be introduced to parliament in the coming months to implement’s the government decision to introduce a committee for monetary policy decision.

‘For now the expectation of steady policy will limit the impact of the RBNZ policy on the NZD. Clearly the evolution of inflation and the new MPC could cause the outlook to change later in the year. However, in view of the potential risks associated with the threat of trade war we expect the RBNZ to err of the side of caution in the foreseeable future.’

Australian Dollar Gains Forecast to Ease on Private Sector Credit Data

As forecasts point towards February’s Australian private sector credit growth holding steady at 4.9% on the year the Australian Dollar could struggle to find additional upside potential tomorrow.

However, an upside surprise from the data may give AUD exchange rates a renewed boost, as an increase in credit suggests greater confidence within the domestic economy.

On the other hand, any weakening could see the Australian Dollar falling out of favour with markets once again.

With the Reserve Bank of Australia (RBA) looking set to leave interest rates on hold for some months to come the ultimate impact of Thursday’s data could still prove rather limited.

The AUD/NZD exchange rate may also see some volatility in the wake of the latest US personal consumption expenditure data, which is the Federal Reserve’s preferred measure of inflationary pressure.

A stronger showing here may encourage the Fed to adopt a more aggressive approach towards monetary tightening, increasing its policy divergence with both the RBA and RBNZ.

As a result, both the Australian Dollar and New Zealand Dollar could come under additional pressure tomorrow afternoon.

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TAGS: Australian Dollar Forecasts