- Rates ‘to remain on hold into 2020’
- Good news on business confidence
- Brexit still dragging down the Pound
By Halo Financial Team
Think back to our last report and we were highlighting the fact that GBPNZD had broken the 2.00 point in September 2018. The same happened in October, when a high of 2.044 was reached in typical mid-market rates. But since then, it has been downhill for Sterling, which reached a low of 1.813 on 12th December 2018, as UK Prime Minister, Theresa May, was bruised by a vote of confidence brought by members of her own party. The New Zealand Dollar low was due to bad business news, international trade concerns and fears that the interest rate would remain low into 2020. During the next three months, the performance of the Pound is likely to be dominated by how Brexit unfolds and whether there is a deal or no deal before the 29th March 2019 leaving date.
Rates ‘to remain on hold into 2020’
The Reserve Bank of New Zealand (RBNZ) expects its Official Cash Rate (OCR) to remain at 1.75% into 2020. The timing of any change depends on economic growth and the rate of inflation, it says. Growth in Gross Domestic Product (GDP) is expected to pick up over 2019 and core consumer price inflation to rise to around the 2% target. However, weak business sentiment and international trade tension could weigh on growth for longer, admits Governor, Adrian Orr. The unemployment rate, which is at 4.5% in the final quarter of 2018, is close to its best sustainable level. “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,” the bank concludes.
The importance of financial stability
The latest Financial Stability report from the RBNZ was well received by the currency markets. Although financial systems risks in New Zealand remain high, they have eased, thanks to a slowdown in property price rises and mortgage lending growth, the RBNZ says.
“New Zealand is exposed to global risks through both trade and our banking system’s need for foreign funding. However, banks have reduced their reliance on foreign funding over the past decade, improving their resilience to global risks. Household lending growth has slowed, and fewer mortgages are being provided at high multiples of income or on interest-only terms. This is helping to gradually improve the financial resilience of the household sector. House price growth has also slowed, particularly in Auckland. We think house price growth will remain low for some time, particularly as some Government initiatives are likely to weaken demand and support supply. The longer that house prices grow slowly, the less likely it is that they will fall sharply in the future.”
As a result, it eased mortgage lending restrictions and will monitor banks’ behaviour. Banks can now make up a fifth of new mortgage lending to borrowers putting down less than a 20% as a deposit.
Previously the limit was 15%. The minimum deposit for property loans has also been relaxed, from 35% to 30% of a home’s value. RBNZ is still concerned that high debt and asset prices mean the global economy remains vulnerable to shocks. At the same time, high debt levels open up New Zealand households to financial risk. Banks still need to better manage their conduct risk and lend responsibly, the report says.
US/China trade wars pause
News from G20 meeting in Argentina at the start of December 2018 that US President Donald Trump and Chinese President Xi Jinping have negotiated a pause for breath in the trade wars helped boost the New Zealand Dollar. The two sides agreed to put any new action on hold for 90 days, until 1st
March 2019, so they could talk further. President Trump had previously been planning to increase tariffs on $200 billion of Chinese goods from 10% to 25% in the New Year. So far, the US has imposed trade duties on $250 billion of Chinese goods in retaliation for “unfair trade practices. China has itself added import duties on US products worth $110 billion. China is New Zealand’s number one trading partner for both imports and exports with two-way trade valued at over NZ$28 billion in 2018. Thanks to this relationship, trade challenges and opportunities and economic performance in China have a marked effect on the strength of New Zealand’s own economy, and indeed, its currency. The US is New Zealand’s third-largest individual trading partner, so US-China tensions pose a double whammy threat. Add to that the effects of commodities pricing on the New Zealand, Asia Pacific and North American currencies, and you have a recipe for volatility.
Good news on business confidence
At last, some good news has been delivered from a New Zealand business survey. After a series of downbeat reports from various sources, a new quarterly survey suggests that business confidence was positive at the end of 2018. Technology, tourism and hospitality, health, and business services all registered the highest confidence, according to the BNZ Business Banking Survey. Retail, agriculture and construction registered the lowest confidence. The most important factor in business confidence is finding suitably qualified employees, the survey suggests. The findings contrast with the latest quarterly report from the New Zealand Institute of Economic Research (NZIER).
It found business confidence had fallen to a nine-year low over worries concerning higher costs and slowing demand biting into profits.
A net 28% of firms expect economic conditions to worsen in the coming months, 7% more than in June 2018. Even so, they were more positive about prospects over the next six months, with 10% expecting improvements in business.
Concerns over slowing population growth
NZIER itself has reduced its growth outlook for the New Zealand economy in the first quarter of 2019, due to slowing population growth. Indeed, the latest figures from Statistics New Zealand show that population growth reached a three-year low, with a net gain of 61,751 in the year to October 2018. The figure is 12.7% down year-on-year, with 2.7% fewer people arriving in New Zealand and 8.9% more people leaving. The arrivals were led by a 10.7% drop in Chinese nationals, 8.4% fewer from Germany, a 7.7% decline in UK arrivals, a 4.6% fall from Australian nationals and a 4.4% drop from French citizens. Looking at those leaving New Zealand, 37.9% more headed for China and 18.8% more left for all Asian countries.
As a result of the decline in immigration, NZIER has lowered its prediction of New Zealand economic growth for the first three months of 2019. Principal Economist Christina Leung, says, “We have reduced our growth outlook, and now expect annual GDP growth to average around 2.8 percent over the next five years. While that represents a respectable outcome for the New Zealand economy, there are downside risks to the outlook.”
There are also offshore risks from trade tensions between the US and China, uncertainty over how Brexit will play out and market adjustment to higher global interest rates. Looking ahead, NZIER expects inflation to rise in 2019, but sees little prospect of interest rates increasing until 2020. “Interest rates are lifting globally, led by the US Federal Reserve.
Although the Reserve Bank continued to highlight the potential for the OCR to move lower should growth not pick up as much as it forecasts, we still expect the next move in interest rates to be up. However, the Reserve Bank will be cautious about lifting interest rates too soon, and we continue to expect it will keep the OCR on hold until the first half of 2020.”
Brexit still dragging down the Pound
Here we are, into 2019 and Britain still faces major uncertainties over Brexit, which has dragged down the Pound against the kiwi for months. The UK is due to leave the European Union on 29th March, but the chances of a no-deal scenario have increased recently, with the UK government already spending an extra £2 billion on preparing for the possibility. It has even admitted in its technical notices that no-deal is no longer an “unlikely” option. At the same time, businesses who trade with the European Union have been warned that they need to prepare for a no-deal scenario. There was initial optimism that a deal would be reached, but after Prime Minister Theresa May’s solution was unveiled at Chequers, serious doubts were expressed by ministers, with some resigning.
There was good news when EU leaders approved the terms, but as weeks went by, more British MPs opposed the proposals, mainly because of issues with the idea of an Irish backstop – a last resort to keep an open border. In December, enough Conservative votes were submitted to the 1922 committee to warrant a vote of confidence in the leader. Mrs May won that vote, but a third of backbenchers voted against her.
If there is no Brexit deal, the UK is likely to see major disruption from transport and travel, visas and border access, availability of food and medicines, security and more. Trading costs are likely to increase and the UK’s top five business groups have called on the government to prevent a no-deal scenario. They say, “Businesses have been watching in horror as politicians have focused on factional disputes rather than practical steps that business needs to move forward. The lack of progress in Westminster means that the risk of a ‘no-deal’ Brexit is rising. Businesses of all sizes are reaching the point of no return, with many now putting in place contingency plans that are a significant drain of time and money.
Brexit uncertainty bites business
Firms are pausing or diverting investment that should be boosting productivity, innovation, jobs and pay, into stockpiling goods or materials, diverting cross border trade and moving offices, factories and therefore jobs and tax revenues out of the UK. While many companies are actively preparing for a ‘no deal’ scenario, there are also hundreds of thousands who have yet to start – and cannot be expected to be ready in such a short space of time.” They go on to say the responsibility to find a way forward now rests directly with 650 MPs in Parliament. “Nobody wants to prolong the uncertainty, but everyone must remember that businesses and communities need time to adapt to future changes. As the UK’s leading business groups, we are asking MPs from all parties to return to their constituencies over Christmas and talk to their local business communities. We hope that they will listen and remember that when they return to Parliament, the future course of our economy will be in their hands.”
Theresa May says she intends to make whatever option is reached work. “Let’s be clear about this, under ‘no-deal’ there would be some short- term disruption. It’s our job as the government to make sure we make a success of no-deal, just as we make a success of getting a good deal.” In the week beginning 14th January, MPs are set to vote on the Brexit deal. Meanwhile, opposition MPs are seeking to add an amendment to the finance bill that would only allow a no-deal if members of Parliament voted for it. That will also be decided by MPs once they return from their Christmas holidays.
Brexit concerns spill over to economy
In December, there was bad news about the UK economy, with the current account deficit reaching a two-year high of £26.5 billion or 4.9% of GDP in Quarter 3, 2018. This was up £6.5 billion on the previous three months. At the same time, real household disposable income stagnated, according to the Office of National Statistics figures. As a result, British households borrowed more and the savings ratio reached its third lowest at 3.8%, down 0.3% on the previous quarter. It was the eighth quarter in a row that households spent more than they earned. Businesses also held back in the light of Brexit with investment down 1.1% quarter-on-quarter to £46.9 billion. In the last year, investment is 1.8% lower. In fact, it has fallen three quarters in a row for the first time in 10 years, but there was some good news. UK Public Sector Net Borrowing fell to £7.2 billion in November 2018, £900 million less than a year earlier. It is the lowest November shortfall since way back in 2004.
What next for GBPNZD?
There may be mixed signals coming from the New Zealand business community, but there is little doubt of the intentions of the bank over interest rates. The Reserve Bank of New Zealand is sticking to its intentions to hold interest rates through 2019 and into 2020. Unless there is a major shift in the economy at home or overseas trade, then the upside of the kiwi looks to be limited. However, with the possibility of a no-deal Brexit rising, the markets are in no mood to back Sterling until more is known about the terms on which the UK is leaving the European Union in March 2019 – that is, assuming it is still leaving!
Technical guidance for NZD buyers and sellers
The GBPNZD currency pair remains trading within the larger range – it was looking vulnerable a few weeks ago after it broke down below 1.8300, but it bounced strongly and for the last month has been slowly working its way back to mid-range. Prices have stalled at the 1.90 level and with the concerns over UK Hard Brexit and the upcoming UK parliament vote on Theresa May’s deal, it’s possible that prices will head back down towards the 1.83 level.
In terms of the technicals, while prices remain above the two day moving average (currently 1.8750), there is a chance that before the UK vote during week of 14th January we will get one more spike in prices, so putting in Limit order at 1.90-191 wouldn’t be a bad idea in the very short term. If prices fall below 1.87, that will be a bearish sign.
Markets are particularly volatile in the current political and economic climate, so keep a close eye on rate movements and speak to your Currency Consultant for the latest guidance and available rates.