- Brexit continuing to hamper Sterling
- UK Data surprisingly robust
- NZD stronger on high yield and positive economics but trade deficit widen
Great Britain and New Zealand are almost directly opposite each other on the planet and are currently poles apart economically. The British Pound and New Zealand Dollar are acting in a likewise manner.
That has brought the GBP-NZD exchange rate to a historical low and to a point where we could see new records set in the months ahead.
However, the exchange rate volatility has a dampening effect and we may well see this pair swing back in the other direction if conditions change; and as the impact of the very strong NZ Dollar and the exceptionally weak Pound affect their respective domestic economies.
Here, we will cover some of the possible outcomes for this exchange rate, the domestic and external factors that may influence those movements and other factors that will have an impact on this exchange rate.
Brexit – Britain in limbo
Having voted to leave the EU, Britain awaits the firing of the starting gun for those negotiations. When the new Prime Minister, Theresa May, invokes Article 50 of the Lisbon Treaty, the clock will start ticking on the two year negotiating timetable – and that is probably why it hasn’t happened. And so we wait…
The impact of this pause is palpable. Businesses are delaying investment decisions, every industry is making its case for the deal it wants to see and each individual EU and UK politico is espousing one view or another.
But the fact is that no one knows what shape the final agreement will take. Negotiations never start at the end point and this posturing from all sides is tantamount to boxers throwing a few jabs as they enter the ring to show their opponent how fast and sharp they are.
UK data largely robust
In spite of all the pre-referendum posturing, the UK economy hasn’t collapsed. We didn’t need an emergency budget, taxes haven’t risen, employment is at a record high, consumer and business confidence has recovered from the initial post-referendum shock and the Organisation for Economic Co-operation and Development (OECD), The International Monetary Fund (IMF) and The Office for National Statistics (ONS) have all stated that the impact hasn’t been as bad as they forecast. We were even told that the economic impact had been negligible...thus far.
We have to be cautious. Sterling is reflecting that caution. There is no doubt that many businesses that had planned investment into UK organisations have paused. The question of Britain’s post-Brexit access to EU markets is an obvious and understandable concern and, unless the UK meditators do a fine job, we will see investment flows seek avenues of easier access to Europe. The pressure is on to get it right.
Nonetheless, Sterling, which is down to €1.15 and US$1.30 at the time of writing, is significantly oversold at current levels. I will cover the GBP-NZD rate in more details below.
NZD stronger on high yield and positive economics but trade deficit widens
In a world where most interest rates are at 0% or thereabouts, the 2.0% yield offered by the Reserve Bank of New Zealand is very attractive indeed. That, allied to positive domestic data, is luring investment funds into New Zealand.
Strength in the NZ Dollar is a double edged sword though. It makes imports more affordable and it makes NZ exports less attractive to overseas buyers. No wonder, then, that the NZ trade gap in the three months to August rose to NZ$1.265 billion. The Reserve Bank of New Zealand could weaken the Kiwi Dollar if they chose to cut the interest rate again, but that would also stimulate an already quite buoyant domestic economy.
All of these factors have brought the Sterling – New Zealand Dollar exchange rate to levels not seen since 2013.
Technically, the GBPNZD rate is precariously balanced on the same support level it found in 2013, but this is a record low. The fall from the 2016 high of NZ$2.20 has been dramatic. The low we saw in the immediate aftermath of the Brexit vote was NZ$1.77 and that level has been tested several times in the intervening weeks. Undoubtedly, the Pound is massively oversold at this level and may be in the embryonic stages of a recovery. A rally beyond NZ$1.80 could take us to NZ$1.90 without much drama, but this could be a drawn out recovery, with Brexit talk constantly weighing on the Pound. If NZ$1.75 breaks on the downside, we are into unprecedented regions of the market for this pair and we ought to expect NZ$1.70 as a short term target.
For NZD buyers
Any bounce in the GBPNZD exchange rate is likely to hit heavy NZD buying interest around that NZ$1.80 level. If that does give way, NZ$1.90 will cap the initial rally and, at this stage, the dream NZ$2.00 level seems light years away.
For NZD sellers
These are great times if you are looking to sell NZD and buy Sterling. Being able to do so at exchange rates we haven't seen since June 2013 is a bit of a coup and, as the markets were forecasting a 'Remain' vote, is as unexpected as it is attractive. If you are risk-averse, you will cover some or all of your needs at current levels. If you have more time on your hands and are a bit more ambitious, you may be tempted to look for a break of the recent low and levels in the NZ$1.70 to NZ$1.65 range. The word of caution is that this exchange rate has fallen far and fast and is looking ripe for a recovery. Waiting for better levels without any kind of risk protection in place could be very expensive.
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