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2019

GBP jumps against NZD on Brexit optimism

Published: Wednesday 06 March 2019

  • ​​All eyes on March Gross Domestic Product figures
  • Not all bad news for New Zealand Dollar
  • Nail-biting Brexit going to the wire
The Pound rose to a three-month high in February as markets become more hopeful that a no-deal Brexit could be avoided. GBP reached a monthly high of 1.949 against the NZD in typical Interbank rates towards the end of February, a healthy rise from 1.868 on 15th February after the UK government lost a Brexit vote following concern from ‘hard Brexiteers’ that the no-deal option might be removed, and the New Zealand Dollar strengthened after an upbeat assessment from the Reserve Bank of New Zealand (RBNZ). However, there are still concerns about a possible interest rate cut, which has weakened the New Zealand Dollar. Brexit and the New Zealand economy and interest rate policy are likely to affect both currencies throughout March.

All eyes on March Gross Domestic Product figures

The fledgling fears we highlighted last month about whether the next move for New Zealand interest rates would be a cut, resurfaced during February, weighing on the New Zealand Dollar. They were reignited by Geoff Bascand, the Deputy Governor of the Reserve Bank of New Zealand, following comments on a new consultation paper, Safer Banks for Greater Wellbeing.

Some market experts had suggested that interest rates might have to change due to higher capital requirements to make the banking system safer. In a series of supporting slides, the bank admitted, "Interest rates (borrowing and lending) could change — but we don't expect by much." In a press briefing, Mr Bascand said the measure would marginally tighten monetary conditions. This could lower inflation, forcing the bank to cut interest rates. “If we were worried, and thinking we were undershooting inflation, undershooting maximum sustainable employment, then we would obviously look for an [Official Cash Rate] OCR change.” he said.

RBNZ Governor, Adrian Orr, previously predicted that rates were not likely to change until 2021. However, Gross Domestic Product (GDP) growth in Quarter Three was the weakest GDP for four years and if performance does not improve, the central bank has suggested it could cut rates. So, all eyes will now be on the release of Quarter Four, 2018’s GDP results on Thursday 21st March. Any lowering of interest rates is likely to weaken the value of the New Zealand Dollar against the Pound.

New Zealand business confidence wobbles again

Despite rising in December 2018, business confidence fell back in March, according to the Australia and New Zealand Banking Group (ANZ) New Zealand Business Outlook. Confidence fell seven points with a net 31% of respondents expecting general business conditions to deteriorate in the year ahead. ANZ chief economist, Sharon Zollner, says, “Leading indicators such as business surveys and light traffic flows are suggesting that the New Zealand economy is running out of steam."  Firms’ expectations for their own activity eased three points to a net 11% expecting a lift. The agriculture and services sectors are the most optimistic and the construction sector the least. A net 2% of firms are expecting to increase investment, down two points, with employment intentions falling four points to +3%. A net 38% of businesses expect it to be tougher to get credit, reversing an improvement to net 19% in December.

Not all bad news for New Zealand Dollar

However, it was not all bad news for the New Zealand Dollar. It made gains in mid-February following a more optimistic note sounded in the February Official Cash Rate (OCR) decision. The rate was kept at 1.75% and the bank expected it to remain in 2019 and 2020, Adrian Orr reiterated. “The direction of our next OCR move could be up or down. Employment is near its maximum sustainable level. However, core consumer price inflation remains below our two percent target mid-point, necessitating continued supportive monetary policy.”

Concerns over China economic slowdown

However, there are concerns over a slowdown in the Chinese economy, Mr Orr admitted. “Trading-partner growth is expected to further moderate in 2019 and global commodity prices have already softened, reducing the tailwind that New Zealand economic activity has benefited from. The risk of a sharper downturn in trading-partner growth has also heightened over recent months.” But the bank believes that would be offset by a rise in GDP at home.

“Despite the weaker global impetus, we expect low interest rates and government spending to support a pick-up in New Zealand’s GDP growth over 2019. Low interest rates, and continued employment growth, should support household spending and business investment. Government spending on infrastructure and housing also supports domestic demand.”

Inflation expected to increase

As capacity pressures build, consumer inflation is expected to rise to around the mid-point target range at 2%. He concludes, “There are upside and downside risks to this outlook. A more pronounced global downturn could weigh on domestic demand, but inflation could rise faster if firms pass on cost increases to prices to a greater extent. We will keep the OCR at an expansionary level for a considerable period to contribute to maximising sustainable employment, and maintaining low and stable inflation.”

Retail Sales strong

And there was good news on the retail sales front, which rose by a strong 1.7% from October-December 2018, 1.4% higher than in September, according to Statistics New Zealand, and way ahead of market expectations. In total, 11 of the 15 retail industries recorded higher sales. In addition, Finance Minister Grant Robertson said at the end of February that the latest Crown accounts show the New Zealand government's financial position and underlying economic fundamentals remain sound. That provided protection from global volatility.
 
Coins of New Zealand. Maori carving - Halo Financial

Generally solid economic performance

The Crown financial results for the seven months to 31 January 2019 show a $1.9-billion operating balance before gains and losses surplus. Net Core Crown Debt is in line with the half-year forecast at 20.7% of GDP.  The forecasts show the government is on track to meet the Budget Responsibility Rule of reducing net debt to 20% of GDP within five years of taking office, Mr Robertson says. "Our responsible fiscal management of running surpluses and keeping expenses and debt under control is necessary and effective." The latest New Zealand Institute of Economic Research's Quarterly Predictions forecast economic growth of around 2.7% over the next five years. While this is slightly lower due to global volatility, it still represents the longest stretch of growth in New Zealand since 1992. The Quarterly Predictions also noted the business confidence improved in the December quarter and the labor market is expected to remain solid. "The New Zealand economy is performing well, meaning we are well-placed for any increased international economic slowdown," Mr. Robertson concludes.

Nail-biting Brexit going to the wire

Britain is taking the nail-biting Brexit saga to the wire. With just a month to go until the UK is due to leave the European Union on 29th March, no agreement has been reached between the EU and the UK. However, some important issues are on their way to being resolved.

The UK government has agreed to seek to safeguard citizens’ rights, whether or not there is a no-deal Brexit. It accepted MP Alberto Costa’s amendment at the end of February that if no deal is reached over Brexit, it will seek a deal from Brussels to protect the rights of British nationals settled in the EU and EU citizens in the UK. The amendment “requires the Prime Minister to seek at the earliest opportunity a joint UK-EU commitment to adopt part two of the Withdrawal Agreement on Citizens’ Rights and ensure its implementation prior to the UK’s exiting the European Union, whatever the outcome of negotiations on other aspects of the Withdrawal Agreement.”

As a result, the Pound rose to near 1.95 in typical mid-market rates – a six-month high, boosted further by rumours that the European Union could demand an extension for British membership until December 2020.  MPs also passed the Cooper/Letwin amendment saying that if MPs vote to delay Brexit, the government should seek an extension from the European Union and bring forward legislation to change, in law, the date of the UK's departure. It is not binding in the same way as an Act of Parliament, but is an expression of the will of the House and that would be politically difficult for Prime Minister, Theresa May, to ignore.  

In any case, the amendment simply formalises the promises made by Mrs May the day before to allow MPs to prevent no-deal and seek an extension to exit day. After the votes, Reuters asked major banks and financial organisations to assess the risk of a no-deal Brexit. The answers ranged from 10% to 53%, illustrating that no-one really knows how Brexit will end. With that in mind, it is important to keep abreast of the news and watch the markets, if you are due to exchange Sterling.
 
For NZD Buyers...

Due to the pressing and imminent nature of Brexit, March should be an extremely volatile month for all GBP pairings and GBPNZD is no different. If Theresa May manages to get a deal through Parliament, we should expect to see Sterling bounce. 1.96 is the next level of resistance, but in the event of a deal being agreed it would likely push through that and the next point to target would be the 2.02 high we saw back in October 2018.

If a no deal Brexit is avoided at the end of March, but a deal has yet to be agreed and Brexit is postponed, we would expect Sterling to rally a touch, but largely tread water.

The risk is a no deal Brexit – if that is the case, a sharp Sterling depreciation is expected. The post-Brexit lows of 1.70 would be on the horizon again.

For NZD Sellers

A no deal Brexit looks to be off the table as politicians on both sides of the channel look determined to avoid such a scenario. However, if the UK does leave the EU on 29th March without a deal then the NZD is expected to rally and it would be a superb time to sell NZD into GBP – looking to target 0.5880. As mentioned earlier, however, this looks at the moment to be unlikely and therefore waiting is the riskier option.

If Mrs. May manages to push her deal through or the deadline for leaving the EU is extended, the Pound is expected to rally as the no deal uncertainty would be avoided. Those clients unwilling to gamble should look to sell NZD before any news regarding a deal/extension is made in March.

Whilst we are not at the best levels since Brexit, there have only been a few months in the past 10 years where the NZD has been this strong versus the Pound and it remains an excellent level to buy GBP.
 
GBPNZD - March 2019 - Halo Financial

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