The Pound to New Zealand Dollar exchange rate (GBP/NZD) strengthened slightly yesterday as investors sold the Antipodean currency following a disappointing Fonterra dairy auction. The upward movement completed a 3-cent weekly gain for Sterling.
Dairy products make up around 30% of New Zealand’s total exports, and the Fonterra Group accounts for around 95% of New Zealand’s total dairy produce. As New Zealand’s biggest corporation, the performance of Fonterra is closely linked to the performance of the New Zealand economy and also the ‘Kiwi’ Dollar. When Fonterra dairy prices are high more money flows into New Zealand, and subsequently into the New Zealand Dollar. The opposite is true when Fonterra prices decline.
Early on Thursday morning it was reported that Fonterra dairy prices plummeted by -8.9% at the latest auction due to depressed demand from China – New Zealand’s most lucrative export market. The news sent GBP/NZD up from 1.9660 to a fresh 5-week high of 1.9740 as investors adjusted their valuations of the Antipodean currency.
GBP/NZD 3-cent gain
Sterling began the week just below 1.9400 against the New Zealand Dollar but the Pound surged higher to 1.9540 on Tuesday when British CPI inflation rose unexpectedly from 1.5% to 1.9%. The upbeat inflation report caused investors to push forward their Bank of England rate hike bets and it is now predicted that the BoE could start raising the benchmark interest rate before the end of 2014.
During the evening on Tuesday the Pound managed to stretch its gains against the ‘Kiwi’ in response to news that the New Zealand consumer price index stuttered during the second quarter. Analysts had anticipated the headline inflation rate to rise from 1.5% to 1.8% but the actual figure only showed a minor increase to 1.6%. The disappointing numbers caused some traders to grow a little bit anxious ahead of next week’s Reserve Bank of New Zealand interest rate decision.
The RBNZ is widely expected to hike interest rates from 3.25% to 3.50% next week, but with inflation printing tepidly and NZD/USD trading close to 30-year highs there is a growing chorus of doubt amongst some market players. The fear is that RBNZ Governor Graeme Wheeler could use next week’s meeting as a platform to signal an end to the bank’s hiking cycle. However unlikely this may be, the mere suggestion of it was enough to soften demand for the ‘Kiwi’. If Wheeler were to halt the hikes then it is entirely likely that the Pound could rally all the way towards 2.0000 against the New Zealand Dollar.
If the RBNZ sticks to the scripts and continues to increase interest rates then GBP/NZD could soften slightly.
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