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Business confidence, bank decisions and Brexit dominate GBPNZD

Published: Tuesday 21 August 2018

  • ​​Central bank does no favours for NZ Dollar
  • Huge drop in New Zealand business confidence
  • Rising fears of no-deal Brexit
Sterling and the New Zealand Dollar values have changed by 2.64% over the last month. Similar to July, the peak of typical mid-market rates was 1.957, while the low was 1.907. However, in truth, both currencies suffered from major weaknesses.

The low in GBPNZD came on 8th August, amid continuing concerns over a no-deal Brexit. These were bolstered by comments from international trade secretary Liam Fox who put the odds of no-deal at "not much more than 60-40".

Bank does no favours for Kiwi

Just a day later, the Pound bounced back to 1.942, as the central bank did no favours for the kiwi. As expected, it held the Official Cash Rate (OCR) at 1.75% in August, but then dealt a blow to the NZD as Reserve Bank Governor Adrian Orr went on to say, “We expect to keep the OCR at this level through 2019 and into 2020, longer than we projected in our May Statement. The direction of our next OCR move could be up or down.”

While recent economic growth has moderated, the Reserve Bank of New Zealand (RBNZ) expects it to pick up pace over the rest of this year and be maintained through 2019.

Robust global growth and a lower New Zealand Dollar exchange rate will support export earnings, it says. Low interest rates, combined with capacity and labour constraints, will promote business investment. Government spending and investment is also set to increase, while residential construction and household spending remain solid.

Employment is near its maximum sustainable level and there are welcome early signs of core inflation rising towards 2% as capacity pressures bite.

There are risks, however. “The recent moderation in growth could last longer. Low business confidence can affect employment and investment decisions. Conversely, there is a chance that inflation could increase faster if cost pressures can pass through into higher prices and impact inflation expectations.”

Despite that, Mr Orr told TVNZ1’s Corin Dann that the signs were positive for the economy and the risk of slowdown was very low.

"The signs are very positive. You've got a lower exchange rate, meaning we're earning more for our offshore efforts; the world growth is still very strong; the government is out spending and investing; households are still consuming, and business investment should be increasing."
Huge drop in New Zealand business confidence

Last month, Halo Financial reported how New Zealand business confidence was at a seven-year low. Now, more evidence has emerged of the downturn from no less than the Organisation for Economic Co-operation and Development (OEDC).

Just two years ago, New Zealand was third in the world for business confidence rankings, with a score of 100.93 on the OECD Business Confidence Index.

But now, New Zealand is a measly fifth from the bottom with a score of 99.54 – below the long-term average of 100 – only ahead of the Slovak Republic, Turkey, South Africa and South Korea.

Prime Minister, Jacinda Ardern, returning from maternity leave, acknowledges business confidence is low, but points to pressure from international trade wars.

"We are in an international environment at the moment where there is a tit-for-tat trade war that will be having an impact I think on the global outlook."

She acknowledged there was a skills shortage in the country. "Confidence and certainty are obviously connected and we are going through a period of change.

"The business wants us to invest in skills, it wants a more productive economy, it wants us to diversify, that means there will be change. We need to bring them with us on that."

Immigration New Zealand's immediate skill shortages list includes an array of jobs. Trades in demand include bricklayers, carpenters, joiners, glaziers, metal fabricators, motor mechanics, panel beaters, roof tilers, scaffolders and stonemasons.

New Zealand’s recent decision to ban foreign ownership of New Zealand homes may also have an effect on the economy, given New Zealand’s popularity as an emigration destination and recent pushes for overseas investment through initiatives such as entrepreneur visas.
New Zealand Currency - Fifty Dollar Bill

Rising fears of no-deal Brexit

Another month goes by and again we are taking about Sterling being dragged down by Brexit, this time, by increasing worries over Britain leaving the European Union in March 2019 with no deal.

UK Secretary of State for Foreign Affairs, Jeremy Hunt, has admitted the risk of a no deal Brexit is increasing as the weeks go by. “Everyone needs to prepare for the possibility of a chaotic no-deal Brexit,” 

He says the European Union should change its attitude to prevent an outcome, which would not only hit the UK hard, but Europe, too. In fact, European Commission officials fear it may suffer more in the short term than Britain.

European Parliamentary elections are set to take place just weeks after Brexit and as countries have the right to veto major decisions, it is difficult for the EU to make quick decisions.

Jeremy Hunt says, “I think the risk of a no Brexit deal has been increasing recently, but it’s not what anyone wants and I hope very much that we’ll find a way to avoid that.” He adds, “We do need to see a change in approach by the European commission.”

Scare stories abound of the effects of no-deal on the UK, from 12% being added to the typical weekly groceries bill and £1,000 a year being added to household bills overall; a scarcity of vital drugs and blood products to transport chaos, including planes being unable to fly.

Now, a new challenge is being mounted in London’s High Court by British Expats who say the recent ruling by the Electoral Commission of undeclared spending by the Vote Leave group, means Brexit is invalid.

The judicial review against the UK Prime Minister, Theresa May, has been submitted by the UK in EU Challenge Group, which represents Britons living in France, Italy and Spain.

The government resists the action, saying it is out of time and that a similar challenge has previously been dismissed.

This continual fear and uncertainty puts more pressure on the Pound and brings it down against the New Zealand Dollar and other currencies.
Guidance for NZD Buyers

Range on GBPNZD remains around 1.89 - 1.96 and has been that way for months now. The market will eventually break up or break down… The trigger will most likely be any deal or no-deal Brexit comments.

In the short term, it would be worth targeting 1.9300; the best case would be a rally to the top of the range, which would see orders at 1.94/1.95 filled.

Guidance for NZD Sellers

There is still the risk of a no-deal Brexit, which would open up a significant fall in the Pound. In the short term, it may be wise to target 1.9100.

In both cases, if the market breaks out of the 1.89 - 1.96 range, I would expect a decent move of 5-10 cents, so 1.80 on the downside and 2.02 - 2.05 and on the topside.

We wait patiently…

GBPNZD - Research Report - August 2018

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