The New Zealand Dollar has so far suffered no ill effect of the strong earthquake that struck North Canterbury on Sunday but the currency's outlook will depend on how the Reserve Bank of New Zealand responds to the damage.
A severe earthquake struck North Canterbury on Sunday November 13th and the tremors were felt across New Zealand.
There have been reports of moderate damage in major urban centres and damage to transport infrastructure.
From a currency perspective the impact on the New Zealand Dollar has so far been limited but if there were to be any drop in economic confidence due to disruption it may increase the odds of another interest rate cut from the Reserve Bank of New Zealand (RBNZ) next year which could weigh on the NZD.
"The NZD fell in response to the earthquakes, but the extent of decline appears fairly limited. The timing of the earthquakes allowed for more information to be available before the markets reacted," says Nick Tuffley at ASB giving an initial response to the earthquake.
It is argued that increased construction requirements will be inflationary which should allow the RBNZ to keep interest rates unchanged as any cuts could risk raising inflation to uncomfortable levels.
However, "at the margin, this morning’s earthquakes could increase the odds of another rate cut next year if economic disruption causes a fall in confidence. While the earthquake was severe, the location suggests a limited economic impact. Several provincial towns have been hit hard, but to date only moderate damage has been reported in NZ’s major urban centres," says Tuffley.
However, it is too soon to say without further information on the extent of damage and disruption, particularly around infrastructure.
In comparison, the 22nd February 2011 Canterbury earthquake caused catastrophic damage to NZ’s second biggest city and economic confidence was at risk.
In response, the RBNZ delivered a 50 basis point rate cut on 10th March 2011 (at its scheduled MPS review), returning the OCR to “emergency settings”.
This had followed two 25 basis point hikes in mid-2010.
The OCR remained at 2.5% until March 2014.
Interest rate cuts tend to weaken a currency as global investors are turned off by the decreasing yields their capital offers in such an environment.
New Zealand Dollar Already Under Pressure
Earthquake aside, an expected rise in inflation and interest rates globally is weighing on the New Zealand dollar.
It had previously been the go-to investment for international investors, offering a relatively high 1.75% return in a zero-yield world.
However, now that inflation and interest rate expectations are rising globally, the Kiwi’s advantageous 1.75% return may not look quite to special in the future.
This combined with the Reserve Bank of New Zealand’s decision to cut interest rates by 0.25% has weighed on the currency.
Technical Analysis of Pound to New Zealand Dollar Exchange Rate
GBP/NZD’s rally since the election of Donald Trump is showing technical signs indicating a longer-term reversal of the long-term downtrend may be possible.
Not only has the exchange rate broken above the downtrend line from the July highs, but it has also formed three bullish Japanese candlestick patterns in a row - a Bullish Engulfing, a Three Outside Up and a Three White Soldiers pattern have together in the last three sessions.
When Japanese candlestick patterns occur within a few bars of each other they tend to reinforce each other’s signals, increasing the probability that they will be followed by more upside.
This combined with the trend-line break, and the break of the 50-day moving average, suggests more upside on GBP/NZD.
Therefore, a break above the 1.7705 level would probably confirm an extension higher to a target at 1.7800.
Just above 1.7800, however, lies the R1 monthly pivot which is likely to act as a ceiling to further price gains.
Monthly pivots are levels watched by traders where prices often pause or rebound.
Traders often use them as areas in which to fade the trend, placing orders which are counter to the dominant directional bias in expectation that the pivot will produce a rebound.
Data for the New Zealand Dollar in the Coming Five Days
From a data perspective, it is a quiet week for the New Zealand Dollar (Kiwi), with the most important release coming in the form of PPI Input in Q3, released at 21.45 on Wednesday, November 16.
The data showed a 0.9% rise in the month before.
Data for the Pound
The main release for the Pound in the coming week is CPI (yoy) in October, which is forecast to rise 1.1% in October (from 1.0% previously), and is published at 9.30 on Tuesday, November 15.
Inflation already showed a strong 1.0% rise in September and if it continues to increase it will probably lead to an appreciation in Sterling as it will lessen the probabilities of the Bank of England (BOE) cutting interest rates in December.
Average Earnings on Wednesday may also be significant as an indicator of inflation pressures.
A rise of 2.4% in wages (excluding Bonuses) is forecast in the data from September.
The data is released along with the Unemployment Rate and Claimant count (expected to show a rise of 2k jobs) on Wednesday, November 15 at 9.30.
The week rounds off with Retail Sales on Thursday at 9.30.
The data for October is expected to show a 0.5% rise mom.