GBP/NZD Rocked By UK Inflation Data, but Still Manages to Stay in the Green

Pound Sterling relinquished its daily highs against the New Zealand Dollar following the release of UK inflation data but the exchange rate remains higher than it was 24 hours earlier.

The Pound-to-New Zealand Dollar exchange rate dipped lower on Tuesday, March 14 after the release of UK inflation data showed UK pricse were rising at a pace that undershot the expectations of analysts.

From one Pound being able to buy 1.9130 New Zealand Dollars on the inter-bank market before the release, it was only able to buy 1.9055 after the release, which showed inflation in the UK came out 3.0% in October, which was lower than the 3.1% expected.

The below-expectations result weakened the Pound because it now means that the Bank of England is less likely to put up interest rates, which would be its normal way of remedying overly high inflation.

Rising interest rates are positive for Sterling because they attract more inflows of foreign capital from global investors drawn by the promise of earning more interest on their money - therefore the data which suggests there is no reason for the Bank of England to pursue an agressive pace of interest rate rises has undermined the Pound.

"It is expected that inflation will gradually start to ease back by year-end, so in the new year we should start to see some signs that the impact of GBP weakness slowly starts to moderate. So, for now, the message of the November Inflation Report (IR), which we interpreted as a ‘dovish hike’, isn’t likely to need refreshing at this stage," says Sam Hill, UK Economist at RBC Capital Markets.

New Zealand Dollar Struggling

Despite the Pound suffering a dip on the release of inflation data, the NZ Dollar is having a worse day, falling against eight of the nine other G10 currencies (only the SEK is weaker).

The move is said to be an extension of the currency's recent downtrend which was sparked by concerns over the policies of the newly installed New Zealand government which wants to reform the New Zealand central bank and make it accountable for unemployment as well as inflation.

Under new rules being drawn up, the Reserve Bank of New Zealand would have to use its monetary policy tools to try to combat unemployment as well as inflation.

This would probably mean it would be less likely to raise interest rates than previously, because keeping interest rates low is more likely to help people find jobs, by making it cheaper for businesses to borrow money and expand.

Yet keeping interest rates low would deprive the Kiwi of one of its most potent bullish (which means higher) drivers.

Impact of Chinese Data 

China is New Zealand's second largest trade neighbour so the fortunes of the Chinese economy can affect demand for New Zealand exports, and thereby demand for the Kiwi, which appreciates when exports rise.

Recent data from China has been poor, with New Lending falling and M2 Money Supply thinning.

Further data out this morning, pointed to a slowdown in Retail Sales and Industrial Production too. 

"Slowing growth in China suggests less demand for commodities and is therefore negative for the commodity currencies," says ACLS global Chief Strategist Marshall Gittler.

We include the New Zealand Dollar in the group of currencies under the 'commodity' umbrella.