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Major political and economic events developing

Published: Tuesday 10 July 2018

  • ​​Soft economic data and business confidence
  • Less willingness to take on financial risk, says International Monetary Fund (IMF)
  • Trade war worries
This month, there has been little swing between the British Pound and New Zealand Dollar, but there are some major political and economic events developing that could change all of that. BPNZD have hovered between 1.904 and 1.958 in the last month in typical mid-market rates, a difference of just 0.31%.
Soft economic data and business confidence

New Zealand has seen a series of soft economic data, including Gross Domestic Product (GDP) growth down 0.1% to 0.5% in the first quarter of 2018 and business confidence at a seven-year low.

According to the latest New Zealand Institute of Economic Research's quarterly survey of business opinion, a net 20% of firms polled expect business conditions to worsen, compared with 11% the previous quarter.

As a result, while the Reserve Bank of New Zealand has suggested that the Official Cash Rate (OCR)  could remain at its record low of 1.75% well into 2019, some analysts believe that the rate could even fall further.

Less willingness to take on financial risk, says International Monetary Fund IMF

But among those that do not seem to be too worried about the New Zealand economy is the International Monetary Fund (IMF), which says financial risk in the country has lessened.

There is evidence that New Zealand increased scrutiny in credit extension after the Global Financial Crash and there is now a lower willingness for firms to take on risks, including those from smaller firms, the report concludes.

However, the report was critical of New Zealand’s plan to ban foreigners from buying residential property, which is currently before parliament.

Any restriction on foreign home ownership is unlikely to significantly improve affordability, as only some 3% of buyers appear to be overseas residents, but it would discourage foreign direct investment that could be used to help build more houses, the IMF says in its latest country report.
Trade war worries

Another worrying factor is the developing trade war between the United States and China, which the report highlights.

It warns that there are risks from tighter global financial conditions, structurally weak growth in advanced economies, a significant China slowdown, and a retreat from cross-border impact of interest rate changes, which could trigger a housing market correction.

China is New Zealand’s leading trading partner and is responsible for exports and imports together worth $26.8 billion in the year to March 2018. With the United States imposing $34 billion of tariffs on Chinese imports and Beijing taking reciprocal action, there is concern in New Zealand that its trade with China could suffer from knock-on effects, particularly if more tariffs are introduced.

Brexit dragging down Sterling

Part of the reason why GBP has not benefited more with from New Zealand’s lacklustre economic data and NZD weakness has been an even bigger problem for Sterling – the ongoing Brexit saga, which has just been taken up a notch.

The deadline for withdrawal of the UK from the European Union, in March 2019, is getting ever closer, with no deal over the terms of the exit yet agreed by the two.

In early July, the UK cabinet met at the Prime Ministers Chequers country estate in an attempt to finally agree a way forward that Brexiteers and Remainers could both accept.

Following news of a so-called ‘soft Brexit’  plan to create a free trade area for industrial and agricultural goods and the idea of setting up a “combined customs territory” the Pound initially fell a little against the New Zealand Dollar.

As more details have emerged of the proposals, which will be published in an imminent white paper, questions remain over whether the deal will survive in the midst of fierce internal unease from pro-Brexiteers. In addition, the proposals have to pass another tricky hurdle of being acceptable to the European Union itself.

Indeed, two days after the summit, Brexit Secretary David Davis resigned, followed by junior ministers, Steve Baker and Suella Braverman, who were all members of the Department for Exiting the European Union.

Mr Davis said he was unable to continue as the current policies and tactics made it "look less and less likely" that the UK would leave the customs union and single market.

There have even been whispers that disaffected Brexiteers are planning to challenge the UK Prime Minister Theresa May.

Should the chaos and uncertainty continue, then even more pressure is likely to fall on the battered Pound against the NZD.

Guidance for NZD buyers

Target 1.9500-1.9550 level with some of your funds and leave some aside in case Bank of England hike rates in August, which could trigger a break through 1.9700 to the upside.

Guidance for NZD sellers

Place a stop loss order above 1.9700 as a safety net and look to sell NZD on a retracement to 1.93-1.94 region initially, potentially 1.91-1.9200 level if Bank of England don’t raise interest rates.

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