Pound in Rare Display of Strength Against New Zealand Dollar - What's Going on?

The New Zealand Dollar lost ground against Pound Sterling at the start of the month, an uncharacteristic move for a currency that has enjoyed a strong 2017 to date.

Sterling was itself softer amidst mixed UK data with a rise in mortgage applications being offset by a slowdown in corporate borrowing and a pullback in manufacturing data.

Although most economists did not see the February manufacturing data as anything more than a blip, there were those who saw it has more because it ran against the grain of general global PMI’s which are rising more strongly.

Nevertheless, despite this the Pound rose versus the Kiwi,with GBP/NZD rising to a spot rate of 1.7217 ensuring international bank transfers are done at a rate around 1.67933 while independent currency specialists are seen offering rates towards 1.71.

Recent New Zealand data has not been especially positive, and this may have dampened appetite for the currency.

Firstly, NZ Business Confidence took a dive in January to 16.1 from a previous 21.7.

Then a seperate survey carried showed a fall in the balance of respondents who expect the economy to improve over the next 12 months versus those who thought it would decline.

The survey has a good ability to accurately predict business conditions 3 months hence.

In January, it slipped back to 32.7% from 39.6% previously.

New Zealand trade data was also released, and although it showed a rise in the average price of exports by 4.8% in Q4 this was offset by a fall in the volume of goods by -5.8%.

This could be as a result of the historically expensive levels the New Zealand Dollar trades at and this is something that could become more of an issue over coming months with policy-makers at the Reserve Bank of New Zealand.

While the New Zealand dollar ended the day with losses, it is off its lows courtesy of positive comments from RBNZ Governor Wheeler. 

"Rather than express caution Wheeler said he sees risks around future rate moves equally balanced.  Wheeler is still worried about the strong currency and the global economy but the housing market is strong and its too early to say whether the moderation in prices will continue," says Kathy Lien, co-Director of BK Asset Management in New York.

Wheeler was seen addressing Craigs Investment Partners' Investor Day in Auckland and noted that in effect, "there is an equal probability that the next OCR adjustment could be up or down. 

"We consider the balance of risks for the global outlook to be downside.  For the domestic economy, there is some potential upside for output growth if migration and commodity prices turn out to be stronger than forecast, but the risks around inflation look balanced."

NZ Dollar to Weaken

Analysts at Unicredit meabwhile argue that the New Zealand Dollar is likely to weaken in the near term because the market overexaggerates expectations that the Reserve Bank of New Zealand will raise interest rates when in reality there is less chance of this happening.

“In our view, the relative pricing of rate hikes (between Australia and New Zealand) does not reflect the relative dynamics of the two economies, meaning that too much tightening is priced in for the RBNZ compared to the RBA – especially on a 2Y horizon,” says Unicredit’s FX Stregist Vasileios Gkionakis.

For now this view is certainly an outlier with a strong economy, high interest rates and political stability making it hard to argue against the New Zealand economy and the prospects of its currency over the coming year.