Pound / New Zealand Dollar Plumbs Feb. Lows Following Robust Robust Employment Data

Above: File image of RBNZ Governor Orr. Image © Pound Sterling Live, Still Courtesy of RBNZ.

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    Spot: 1.9110
  • High street bank rates (indicative band): 1.8440-1.8575
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Resolutely robust employment market data out of New Zealand will only underscore the fundamental case for higher interest rates in the country, which should underpin the New Zealand Dollar going forward.

Despite increasing rates of Covid-19 and associated lockdowns New Zealand third quarter unemployment fell to a 14-year low at 3.4%, down from 4.0% previously, according to data from StatsNZ.

The data came as the GBP/NZD exchange rate fell to a new multi-month low.

Wage data revealed average hourly earnings were up 1.2% quarter-on-quarter from +0.7% in the previous quarter.

New Zealand third quarter private wages with overtime included were up 0.7% from +0.9% quarter-on-quarter.

"We expect we’ll see wage inflation rise steeply from here," says Finn Robinson, an economist with ANZ. "Today’s data showed no signs of weakness, despite the economy spending half the quarter in lockdown."

The figures betray an economy in rude health and justifies the recent rate hike to 0.50% by the Reserve Bank of New Zealand, particularly given rising expectations for wage inflation.

Furthermore, the data underscores the case for further hikes over coming months, which should help keep the New Zealand Dollar bid.

Following the data the Pound to New Zealand Dollar exchange rate fell to its lowest level since February when it reached 1.90.

Above: GBP/NZD daily chart.

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The New Zealand to U.S. Dollar exchange rate meanwhile retreated from its recent highs to trade at 0.7128.

The Governor of the RBNZ Adrian Orr meanwhile delivered the November Financial Stability Report in the wake of the data and appeared to temper expectations for materially higher interest rates over coming months.

The move is understandable: if the market gets too carried away financial conditions become increasingly constricted and start providing notable headwinds to economic expansion.

He explained away the strong labour market figures by saying labour market data is highly volatile at present.

Furthermore, he added GDP figures becoming increasingly difficult to understand given Covid-19 volatility.

With regards to housing prices he said the supply of space and land are the main drivers of house price volatility.

While the RBNZ will try and keep market expectations for higher rates in check it will struggle given the rude health of the economy.

Further gains by the New Zealand Dollar are therefore likely. 

"We won’t know for sure that it’s escaped unscathed until we get the Q4 data (next year) – and that’s another reason for the RBNZ to retain their cautious approach, hiking in well-signalled 25bp increments, bringing the OCR to 2.0% by end-2022. But with inflation so high and the labour market so tight, it’s clear that those hikes are needed," says Robinson.