Post-election trepidation for New Zealand
Post-election uncertainty is likely to put pressure on the New Zealand Dollar for a while yet. We have seen patterns in previous elections of a decline pre-election, volatility in the aftermath, then improvement once markets have got to grips with the new government and policymakers. We expect that the New Zealand Dollar will follow a similar pattern.
Markets are nervous at the prospect of central bank changes spurred on by a new government. What will the Reserve Bank of New Zealand (RBNZ) do regarding their monetary policy? After several drops in interest rates, will they change their approach and start to wind down this stimulus? This could certainly be on the cards, given the country’s strong labour market and rising inflation. But political change also has the power to affect the economy, and in turn, the New Zealand Dollar.
Sterling – enjoyed a short period of strength, then fell again…
Sterling fell on the Bank of England’s news of a 0.25% interest rate hike and forecasts that there would only be two minor increases over the next three years. We expect this is a knee-jerk reaction to a dovish tone from the Bank of England. Sterling is likely to recover slowly in the coming weeks, barring any dramatic Brexit announcements. However, with Brexit hovering over the Pound like a shadow – in spite of continued strong UK economic data – Sterling could easily shift in either direction in the coming days and weeks.
Domestic factors – pressure or prop?
An improvement in the New Zealand unemployment levels could also provide a boost to the recently beleaguered New Zealand currency.
The performance of the Chinese economy also has knock-on effects on New Zealand through their close trading relationship. Poor Chinese Purchasing Managers’ Index (PMI) data has added to the New Zealand Dollar’s woes, causing traders to sell NZD following these disappointing results.
With the threat of war in the wake on North Korea’s bomb tests and verbal fight with the US, the flight to safe havens in the form of the US Dollar, Gold and Swiss Franc also has the potential to put pressure on the commodity currencies, the New Zealand Dollar included.
Guidance for Buyers
There’s been a big sell off after the Bank of England announcement, with the market moving down to 1.8880 support and then possibly on to 1.8650 – worth buying some funds here in case GBP fall continues lower, worst case would be 1.7750, which is the bottom of the current trading range.
Guidance for Sellers
Good news! The market topped out at 1.94 and is accelerating to the downside. Place orders at 1.90 and also 1.88. A break below 1.8650 would open up a fall to the next level of 1.84.