Published: September 20th, 2023
The Kiwi is set for gains against Sterling thanks to some better-than-anticipated data out of China. The figures have warmed investor sentiment towards the world's second biggest economy, which has often underwhelmed in the aftermath of COVID-19.
The Pound started the week with a corrective pullback against NZD, however analysts think this Thursday's Bank of England (BoE) rate decision and coming data releases out of Canberra will open the door to two-way volatility.
At time of writing the Pound to New Zealand Dollar rate (GBP/NZD) had fallen back a full three per cent from multi-year highs reached in August.
China's lukewarm recovery has weighed on the Kiwi at various points this year thanks to New Zealand's reliance on exports to the country, particularly agricultural commodities. Against that backdrop, evidence that the worst of the Chinese COVID slowdown is over, could lift sentiment towards NZD.
'Last month’s economic print suggests stability is returning to China’s economy, especially in the manufacturing and retail sectors where revenues look to have bottomed out. Our projections for Chinese GDP this year have been revised upward to 5.2 per cent from 4.9 per cent, while next year is projected to see growth of 4.3 per cent,’ said analysts at ANZ’s FX Strategy Unit in a note to investors.
This week, forex traders will be looking to New Zealand’s second quarter GDP report, due Thursday.
Markets are looking for growth in the range of 0.4 per cent in Q2, which would indicate that the current recession came to an end as Spring flowed into Summer. We’re watching for an end to the weak growth seen in the first half of the year and a rebound in output of around 0.6 per cent,’ added ANZ.
The Kiwi’s relative value against other G10 currencies is often impacted by the data from Beijing. In November 2022 NZD began the month on the back foot as a selloff of Asian and antipodean currencies exposed to events in China gathered steam.
NZD had been in a period of outperformance in Autumn 2022 that saw it hold its ground against G10 peers like GBP. But as month-end drew nearer both the New Zealand and Australian Dollars (AUD) were on weaker ground as forex traders sought shelter from potential economic turmoil in China. The country had been rocked by protests against Beijing’s continuing ‘zero covid’ policy, and the latest restrictions on movement.
Société Générale’s forex strategy unity wrote that the protests had ‘cooled some of the optimism around the end of lockdowns and hit risk-sensitive fiats everywhere.’
Images from protests across China were being widely shared on social media and continued through to mid-November amid signs that more strict lockdowns were looming. Markets were notably unaccustomed to scenes of protest in a society that outsiders assume to be authoritarian and rule-abiding.
A report in the Wall Street Journal said the situation in China had ‘jolted Asia-Pacific investors, as worries mount that the protests could hamper growth in the world's second-largest economy’.
Chinese equities went lower on 29th November, with Hong Kong's Hang Seng Index down a full percentage point. The onshore yuan was weaker against the dollar by 0.5 per cent, having sunk more than one per cent at the open, the biggest 24-hour drop since April.
Société Générale added that ‘NZD was hit by fears about domestic upheaval in China sent investors looking for safety. There are worries that Beijing’s unyielding zero-Covid policy might darken the outlook for growth down under.
Anti-lockdown protests kicked-off after a deadly fire in Xinjiang on 23rd November. Some residents died after being trapped in the residential complex by harsh Covid restrictions.
Given the light economic and event calendar this week, NZD was subject to the news cycle and broader investor sentiment.
New Zealand is a small market heavily dependent on commodity exports and China is its biggest customer. Shifts in demand can heavily affect the country’s overall economic performance and financial flows.
NZD finished Q3 2022 on a weaker trajectory that analysts believed would lead to declines in Q4 2022 and Q1 2023, with two factors likely to weigh on the Kiwi.
The first is the country's cooling housing market. The second is a breakdown in the country's balance of trade exports to China start to slow down.
‘We believe New Zealand’s balance of trade will fall back somewhat as the Chinese property sector continues to slow down,’ said Capital Economics in a research note.
The ebb and flow of Chinese demand remains a crucial driver of economic fortunes down under, as it is the primary destination for New Zealand and Australian exports. If China's economy starts to slow down, it could negatively affect Aukland's own growth forecasts.
The dour predictions arrived just as NZD was solidifying its reputation as one of 2022's top-performing currencies. Only the mighty Greenback and Canadian Loonie were performing better at the time.
According to some analysts, part of NZD's outperformance has been driven by spiking commodity prices, which have been aggravated by Russia's invasion of Ukraine, the squeeze on energy supplies caused by Western sanctions, and ensuing supply chain disruption.
Across the Tasman Sea, a cooling market in Australian residential housing starts and mortgages was also expected to weigh on sister currency AUD, as the knock-on effects of recent Reserve Bank of Australia (RBA) rate hikes make themselves felt across key sectors.
‘There are unmistakable signs that Australia’s housing sector is starting to slow. Residential construction has dropped by almost seven per cent in Q2 2022, quarter over quarter. Supply shortages may be partly the cause, but the sector is also sensitive to rises in the interest rate. As house prices fell in August at their fastest rate since 1983, we believe it won’t be long before the broader sector finds itself in an extended slump.’