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November 2016

NZD: The only certainty is uncertainty

Published: Wednesday 16 November 2016

In spite of the earthquake in North Canterbury, the New Zealand Dollar remains strong. Many would assume that such a dramatic event would immediately weaken the currency, and to some extent that did happen. However, in purely commercial terms, most of the insurance payment funds will come from the UK and US and that will strengthen the NZ Dollar in time. Equally, the impact of the construction expenditure of the rebuilding work will add a few basis points to the GDP growth rate and that is a positive impact on the currency. The timing of each of these events and the extended timescales will make the direct impact less of a sharp move and more of a trend.
Hence, the Sterling – NZ Dollar rate did move up in the 2nd week of November but that was probably more of a Sterling phenomenon. Improving UK data plus an element of profit taking after weeks of GBP selling has boosted the Pound against most other currencies. The interest rate cut from the Reserve Bank of New Zealand undoubtedly weakened the NZ Dollar a little but that had been widely factored into the value of the Kiwi Dollar ahead of the announcement, so the impact was muted.
Events in the UK relating to Britain’s decision to leave the EU – eventually – maybe -  are keeping the lid on any exuberance as far as the Pound is concerned, so the GBP – NZD exchange rate is topping out at NZ$1.77 right now. That level has been pivotal over the last 6 months and proved a very effective support for the Pound in 2013. Therefore, a break to NZ$1.80 or higher would suggest the Pound has turned a corner and higher levels will be on the cards. Caution is the key though and short term risk management is essential. Events in China, in Australia and in the UK are all influential for the Sterling – Kiwi rate, so nothing is certain except for uncertainty and volatility. 

FX Research by Rachael Kinsella