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GBP to NZD Exchange Rate Tumbles as Reserve Bank of New Zealand Plays Down Chances of Rate Cut

November 8, 2018 - Written by Toni Johnson

Since Wednesday’s strong New Zealand job market report, the British Pound to New Zealand Dollar (GBP/NZD) exchange rate has been tumbling. The New Zealand Dollar continued to strengthen on Thursday as the Reserve Bank of New Zealand (RBNZ) tone became more neutral and investors bet that a rate cut from the bank was less likely.

After opening the week at the level of 1.9489, GBP/NZD briefly surged to a weekly high of 1.9657. GBP/NZD trended close to those levels until Wednesday, when strong New Zealand data knocked the pair down around two cents. Since then, GBP/NZD has fallen further and on Thursday was trending near a two month low of 1.9316.

GBP Strength Muted as Investors Anticipate Brexit Developments

Investors have had little reason to buy the Pound this week, as markets highly anticipate major Brexit developments but thus far have seen little.

Monday’s reaction to a report claiming that the EU would offer a UK-wide customs union deal left Sterling stronger, but since then there have been no further developments and analysts have been persistently cautious.

Concerns remain about the possibility that UK MPs could block any potential UK-EU Brexit deal from UK law. The UK and EU are also beginning to ramp up preparation for the possibility of a worst case scenario ‘no-deal Brexit’.

Due to focus on Brexit news, the Pound saw little reaction to this week’s disappointing UK services PMI data and the stronger than expected Halifax house prices index.

Despite caution about whether or not a UK-EU Brexit deal will really be reached in the coming weeks, analysts expect a deal confirmation could lead to a strong surge in Sterling. According to Shanti Kelemen from Coutts and Co.:

‘The Pound is undervalued at current exchange rates, and a deal with the EU would likely bring a relief rally,

What would really unlock value is that if the Brexit uncertainty is removed and the deal doesn’t constrain the economy, you could see the Bank of England raise interest rates.’

NZD Continues to Climb as Markets Play Down Chances of RBNZ Rate Cut

On Wednesday, demand for the New Zealand Dollar surged as investors reacted to New Zealand’s Q3 job market report – which came in far stronger than forecast.

New Zealand’s employment change figure jumped from 0.5% to 1.1%, while the unemployment rate improved strongly from 4.4% to 3.9% despite being expected to worsen slightly to 4.5%.

This meant that New Zealand’s economy was closer to running at capacity. In response to the news, analysts speculated that the Reserve Bank of New Zealand (RBNZ) may be pressured to move away from its cautious stance.

Sure enough, when the RBNZ announced its November policy decision on Thursday the bank took a more neutral tone on monetary policy and said it was carefully watching New Zealand economic activity.

The bank remained cautious of downside risks amid global trade uncertainties, but compared to previous decisions the neutral tone made New Zealand Dollar investors a little more bullish.

Concerns that the RBNZ could cut New Zealand’s interest rates again in the near future lightened considerably, keeping the New Zealand Dollar sturdy.

Some analysts also predicted that the RBNZ may have room to be less cautious. According to Paul Brennan from Citibank:

‘We don't agree that the RBNZ needs to maintain the fence-sitting dual approach to policy,

While our own forecasts show a near-term moderation in GDP growth, we expect CPI inflation to exceed the RBNZ's latest forecasts and maintain the view that the OCR will need to rise from Q3 next year.’

GBP/NZD Forecast: UK Growth Ahead, Brexit Focus to Persist

As the New Zealand Dollar outlook has risen this week, the Pound to New Zealand Dollar exchange rate is on track to end the week lower.

Friday’s slew of UK economic data would typically be influential to markets, but amid the market focus on Brexit developments they may only have a limited impact on the Pound unless they are highly surprising.

UK Gross Domestic Product (GDP) projections for Q3, as well as September growth rate stats, are the most likely to be influential.

UK trade balance results from September, manufacturing and industrial production from September, and business investment data for Q3 may also prove influential if the stats surprise investors.

Ultimately though, if there are any major Brexit developments before the end of the week these will take focus and drive GBP/NZD.

Any signs that a UK-EU Brexit deal could still be reached before the end of November would likely help the Pound to recover some of this week’s losses versus the New Zealand Dollar.
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