The Pound & New Zealand Dollar: Dairy Price Flop Signals Stagnation May Have Ended

The pound sterling to New Zealand dollar exchange rate has been caught in a sideways trend since October. However, we are now seeing signs that rut is over.

The GBP to NZD conversion has seen any attempts at moving higher capped at the 2.30 line over recent weeks - the exchange rate has been rejected at this point on 6 occasions over the last 30 days confirming the resistance to be significant.

But, downside moves are held by the line at 2.26 ensuring a sideways-trending consolidate move, something that neither those hoping for a stronger or lower NZD found very inspiring.

This may have now changed though.

The Price of Milk

Dairy is one of New Zealand's most important economic components, and the prices this produce commands on the global stage has a very real impact on the currency.

News that dairy prices have turned sharply lower has had a similar impact on the New Zealand exchange rate complex.

According to Fonterra, dairy prices fell 7.4 pct at their most recent auction, adding to the 3.1pct fall at the previous event.

Latest Pound / New Zealand Dollar Exchange Rates

	Live: 2.3088▼ -0.17% 12 Month Best: 2.3553
*Your Bank's Retail Rate	2.2303 - 2.2395
**Independent Specialist	2.2765 - 2.2857 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

Employment: A New Headache?

Adding to the negative sentiment was news that the NZ employment situation is cooling. The employment rate fell 0.4%, analysts had positioned the NZD for a rise of 0.4%. The unemployment rate therefore now stands at 6%.

"Today’s September quarterly labour market data were definitely underwhelming. Not nearly as negative as some of the headline results portrayed. But they were, nonetheless, slower than widely anticipated - across jobs and wages," says Craig Ebert at BNZ in Aukland.

Ebert believes the data keeps the case for further interest rate cuts at the Reserve Bank of New Zealand alive, just when the market looked to be going off the idea.

Interest Rates to Undermine NZD Longer-Term

The forecast for the pound to New Zealand dollar ultimately rests on the decision makers at the RBNZ and the Bank of England.

Interest rates matter more than any other single input for global currency markets in the current environment. The NZD was able to arrest its downtrend in October after the RBNZ left the OCR unchanged and failed to hint at any imminent cuts ahead.

The general rule is such that expectations for lower interest rates = a lower exchange rate.

The sooner markets price in a RBNZ rate cut the lower the sooner the NZ dollar should fall, as that timing is pushed back expect the currency to consolidate or even rise.

The view that the RBNZ will opt for a later rise than markets expect is therefore significant as it implies an extension of the current bout of NZ dollar strength we are witnessing.

"We now find ourselves out of consensus in expecting this period on the side-lines to last into 2016, whereas the consensus is looking for a December cut," says an economic note from ANZ Research.

ANZ base their call on the prospect of New Zealand data improving further into the year-end.

If they are correct then, based on the NZD side of the GBP/NZD equation, we could expect the sideways move to extend.

However, the longer the New Zealand dollar remains stubbornly higher, the more uncomfortable the RBNZ will become.

The RBNZ needs a weaker NZD to get inflation back towards 2%; it is just not getting that at present. The Bank could therefore cut to prompt a resumption of the NZD downtrend.

Bank of England: Will GBP Get a Boost on Thursday?

The Bank of England’s Super Thursday looms large on the horizon and is arguably the single most important event for the pound sterling in November.

A pro-GBP outcome could well break the stalemate against the NZ dollar and allow the GBP to NZD conversion to trade above 2.30.

No change to the interest rate is expected, but what markets will be looking out for is a sign that rate rises are imminent.

Specifically, the number of members on the Monetary Policy Committee voting for a rate rise is important. Will McCafferty remain the only person voting for a 0.25% rise, or will Martin Weale and Kirstin Forbes join him and in doing so signal a shift.

Such an outcome would be a positive for the GBP.

Those holding out for a change in the GBP/NZD should therefore look to sterling to break the mould.