The Pound to New Zealand Dollar exchange rate (GBP/NZD) rose by around half a cent earlier this morning to breach psychological resistance at 1.9700. Sterling’s gains during the Asian session came despite a duo of strong ANZ Business Outlook prints.
ANZ reported that its index for Business Confidence jumped from 60.5 to a near-15-year high of 64.1 in December, whilst its Activity Outlook index stormed to a 19-year high of 53.5, compared to 47.1 in November.
The Construction, Agriculture and Manufacturing elements of the report all reflected positively on the New Zealand economy and analysts now predict that the Island nation could post annualised growth north of 5.0% in 2014.
ANZ Chief Economist Cameron Bagrie commented that the dataset:
“Augers well for an economic expansion with real legs”.
Although the ‘Kiwi’ Dollar did not respond well to the result, the underlying strength of the domestic economy is likely to pave the way towards a new hiking cycle from the Reserve Bank of New Zealand in 2014. The RBNZ intends to raise the benchmark interest rate by 225 basis points from the current level of 2.50% to 4.75% by the end of Q1 2016. As the benchmark New Zealand interest rate rises, the appeal of the ‘Kiwi’ is likely to swell among yield-hungry investors.
Indeed, the diverging outlook of the RBNZ and the RBA has allowed the New Zealand Dollar to Australian Dollar exchange rate (NZD/AUD) to reach a near-5-year high. With the Reserve Bank of Australia explicitly keen to weaken the ‘Aussie’ and the Reserve Bank of New Zealand becoming increasingly willing to tighten monetary policy, it is likely that the ‘Kiwi’ Dollar will build upon its 17% year-to-date appreciation against the Australian Dollar in the New Year.
Later this evening the latest New Zealand GDP report is predicted to show that domestic quarterly growth accelerated from 0.2% to 1.1% in Q3 and that annual growth jumped from 2.5% to 3.4%. If the data comes in as expected then the New Zealand Dollar is liable to rally against both the Pound and the Australian Dollar.
However, there is one potential factor that could halt the ‘Kiwi’ Dollar’s progress in the short-term, and that’s the Federal Reserve’s monetary policy announcement later this evening.
Speculation has intensified over the past week suggesting that the Fed could opt to taper its asset purchasing scheme during this evening’s meeting. If the US Central Bank does announce a cutting back of QE3 purchases then perceived riskier assets such as the New Zealand Dollar are likely to see a drop in demand as traders look to flights of safety to protect against heightened volatility.
If the Dec-taper does in fact come to pass then it is entirely possible that the New Zealand Dollar will cede some strength to the Pound, whilst Sterling is liable to weaken against the US Dollar.
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