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2019

Pound pummelled by Brexit, but New Zealand Dollar faces problems of its own

Published: Wednesday 06 February 2019

  • ​​Will New Zealand interest rates be cut?
  • Standard & Poor’s raises New Zealand rating
  • MPs reject no deal Brexit, but vote is not binding
The shocks of Brexit over the last month have seen the Pound rise and fall sharply against the New Zealand Dollar, illustrating the importance of watching the currency markets and the news and keeping in touch with your Halo Financial Consultant. The mid-market low of 1.864 came on 15th January, following the Meaningful Vote by British MPs. The high of 1.941 was reached 10 days later, as analysts believed the chances of a no-deal Brexit were waning. However, by the end of the month, as an agreement with Europe looked less likely, the Pound had slipped back to below 1.90. To illustrate what difference the exchange rates makes, changing £10,000 from GBP to NZD at the high point against the low would have netted clients an extra NZ$770. Meanwhile, some financial analysts have suggested the NZ Dollar could be in for a tough 2019.

Will New Zealand interest rates be cut?

With pressure building on the New Zealand economy, the Bank of New Zealand may be forced to cut interest rates rather than raise them, leading commentators have suggested. If that happened, the New Zealand Dollar could fall to 0.49 against the Pound by the end of 2019; and to 0.47 by the end of March 2020, according to the ANZ Bank’s Quarterly Economic Outlook for January 2019. “Tighter financial conditions and waning global growth continue to weigh on the outlook for monetary policy in New Zealand, while the domestic backdrop also looks more challenging. We now see the next move in the Official Cash Rate (OCR) as being downward, with a cut pencilled in for November and another 50 basis points of cuts to follow in 2020.”

Even so, ANZ does say that, currently, all focus on GBPNZD involves Brexit. The issue is that although the New Zealand economy “has had a good run”, momentum has slowed. Financial conditions are set to tighten, growth is slowing and inflation is not yet on target. That means “the case for a little extra monetary stimulus will become evident. We expect the RBNZ’s next move will be a cut,” says ANZ Bank. At the same time, evidence in mounting that global growth is slowing. All that will weigh on the NZD. Interest rate derivative markets appear to agree with the outlook and are pricing in a 40% chance of a rate cut in 2019. Business leaders are also changing their minds.  A net 6% of firms expects an OCR cut in the next 12 months, compared with net 21% last quarter believing rates would rise, according to the New Zealand Institute of Economic Research's latest business survey.

Standard & Poor’s raises New Zealand rating

However, there is good news for New Zealand on the economic front, after agency Standard and Poor’s (S&P) upgraded its rating. The New Zealand economy outlook improved from “stable” to “positive” and its credit outlook remained at AA+, the second-highest level. A budget surplus would help New Zealand cut its debt and cushion future risks, says S&P, says S&P, "The positive outlook on the long-term ratings on New Zealand reflects our view that the general government budget could achieve a surplus in the early 2020s. This would reduce net general government debt and provide additional resilience to macroeconomic or financial sector risks that could arise due to high levels of external and domestic leverage.”

"This would reduce net general government debt and provide additional resilience to macroeconomic or financial sector risks that could arise due to high levels of external and domestic leverage.”

Economic freedom improves

New Zealand has the third highest economic freedom in the world, according to a new survey. Trade freedom and labour freedom improvements saw its overall score of 84.4 improve by 0.2 points in the 2019 Index of Economic Freedom. The report explains, “The new government shook business confidence in 2018 with plans for a higher minimum wage, union-friendly labour code reforms, fewer immigrant visas, a ban on housing purchases by foreigners, and higher taxes."
 
A macro image of a five New Zealand dollar - Halo Financial

MPs reject no-deal Brexit, but vote is not binding

So, British MPs have spoken – making it clear that they want a deal agreed before leaving the European Union and “alternative arrangements” to the Irish backstop. But they pulled back from making a binding agreement to delay Brexit, as the vote in late January was only advisory. Following the votes on a series of Brexit amendments, European Union leaders have stood firm, saying that no renegotiation over the backstop will be possible. Already, there are suggestions that as a result of the latest chaos that the 29th March deadline for leaving the EU will be extended.

UK businesses are concerned that the ongoing uncertainty and delays, with reports that almost one in three businesses have moved operations from the UK or are thinking of doing so. So says an Institute of Directors (IoD) survey. It reports that 29% of firms among 1,200 members believed Brexit posed a significant risk to their operations in the UK and had either moved part of their businesses abroad already or are planning to do so. IoD’s interim director general, Edwin Morgan, says, “We can no more ignore the real consequences of delay and confusion than business leaders can ignore the hard choices that they face in protecting their companies. Change is a necessary and often positive part of doing business, but the unavoidable disruption and increased trade barriers that no deal would bring are entirely unproductive.”

Carolyn Fairbairn, Director General of the Confederation of British Industry (CBI) called the House of Commons votes another deeply frustrating day for British business. “The never-ending parliamentary process limps on while the economic impact of no deal planning accelerates. The Brady amendment feels like a throw-of-the-dice. It won’t be worth the paper it is written on if it cannot be negotiated with the EU. Any renegotiation must happen quickly – succeed or fail fast.” Adam Marshall, Director General of the British Chambers of Commerce, agreed, saying, “Government and parliament are still going round in circles when businesses and the public urgently need answers.”

These may come over the next month. If no new deal is reached by Valentine’s Day, Thursday 14th February, MPs will get a further Meaningful Vote, Theresa May has promised. If not, then there will be another vote on Thursday 14th March. Although UK MPs say they want a deal, if none can be reached, Britain will most likely leave the EU on 29th March without an agreement. The performance of the Pound over the next two months depend, for the most part, on what happens with this.

Guidance for NZD buyers

The two month long rally in GBPNZD appears to be over. After a strong bounce off the December 2018 lows of 1.81, the Pound gained strength until it bumped to a previous level of support; now resistance comes in at the 1.94 level. This 1.9400 level is critical, as if the currency pair had broken back above and held, it would have signalled a return to the 1.95-2.08 trading range.

As it is, though, prices are now moving back to the downside and the initial target is 1.8600 (January’s low) and then onto 1.8400, which is the bottom of the larger channel GBPNZD has been trading in since mid-2016. Barring any No-deal Brexit event prices, the pairing should return to the top of the short term channel, so NZD buyers target could a rate of 1.92-1.93 and NZD sellers could convert a portion at this point and then more at 1.8650.


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