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2018

Brexit optimism takes GBPNZD to annual high

Published: Wednesday 12 September 2018

  • ​​2.00 GBPNZD within reach?
  • Foreigners banned from buying existing homes
  • Just 200 days to go until Brexit!
The change from August to September has seen a significant lift in the value of Sterling against the New Zealand Dollar. On 28th August, the Pound was at around 1.91 in typical mid-market rates, but by 10th September, it had hit 1.99, an annual high and a near post-Brexit record. The optimism came after comments from European Union chief negotiator, Michel Barnier, that a solution might yet be found. The monthly low was 1.916 and the monthly high 1.992.
 
2.00 GBP-NZD within reach?

Worries over growing international trade wars and concerns over a cooling of the New Zealand economy added to optimism in some quarters that an agreement can be found between the European Union and the UK over Brexit. This is putting a 2.00 rate of GBPNZD within reach.

Reserve Bank of New Zealand (RBNZ) Governor, Adrian Orr, says a long-term focus is vital in promoting economic growth and developing a healthy financial ecosystem.

“Too often, due to short-termism, we view economic growth as something that comes at the expense of a sustainable environment, or social cohesion and cultural acceptance. A short-term focus can be driven by the need to survive from day-to-day. However, it is too often driven by the desire to consume at an unsustainable rate. The desire for instant gratification or reward can often leave behind a trail of unintended consequences.”

The Reserve Bank has a strong vested interest in, and influence on, the long-term economic wellbeing of New Zealand. “The long-term issues are critical to our task of maintaining low and stable consumer price inflation, promoting a sound and dynamic financial system, and meeting the currency needs of the public.

“We have much to work on to remain sustainably prosperous, but we are committed and long-term focused.”

Mr. Orr declares the the key plague on economic society is ‘short-termism’. “This is the overt focus on the next day, week, or reporting cycle. In contrast, by long-term, I mean anything that ranges from ‘outcomes’ over the next few years, through to an ‘idealised vision’ that could last inter-generationally.

“A short-term focus can be driven by the need to survive from day-to-day. However, it is too often driven by the desire to consume at an unsustainable rate. The desire for instant gratification or reward can often leave behind a trail of unintended consequences. Some of these consequences may impact on us personally, but we too often assume we won’t be the one affected.”
 
New Zealand Dollar ‘on endangered currency list’?

The RBNZ’s August trading statement argues that global economic growth has become more broad-based around the world, but inflation and wage outcomes remain subdued and there are  challenges over on going surplus capacity. Bond yields are low, credit spreads have narrowed and equity prices are at record levels.  Monetary policy is expected to remain stimulatory in advanced economies, but less so going forward.

The bank says the trade-weighted exchange rate has increased in response to a weaker US Dollar and a lower New Zealand Dollar is needed to increase tradables inflation and help deliver more balanced growth.

New Zealand’s Gross Domestic Product (GDP) in the March quarter was lower than expected, adding to the softening in growth and monetary policy will remain accommodative for a considerable period.

As a result, the official cash rate remained at the record low of 1.75% and could remain so into 2020, says Mr. Orr.

This caused one commentator to suggest that with financial conditions loosening, the New Zealand Dollar is on the endangered currency list.
 
ten new zealand dollar with coins - Halo Financial

Foreigners banned from buying existing homes

Most foreigners are no longer allowed to buy existing homes in New Zealand.

But the new rules, introduced under the Overseas Investment Amendment Bill, do not apply to buyers from Singapore or Australia, due to existing bilateral trade agreements. They also do not affect new apartments in large developments or off-plan multi-storey blocks.

They do, however, include Chinese buyers – the largest group of foreign property investors, who spent $1.1billion on New Zealand real estate in 2017.

Those who have been living in New Zealand for at least a year, including 183 days in the last 12 months, can purchase a property.

The bill has passed its third and final reading and largely comes into effect from Monday 22nd October 2018.

Associate Finance Minister, David Parker, says, “This is a significant milestone and demonstrates this Government’s commitment to making the dream of home ownership a reality for more New Zealanders.

“This Government believes that New Zealanders should not be outbid by wealthier foreign buyers. Whether it’s a beautiful lakeside or oceanfront estate, or a modest suburban house, this law ensures that the market for our homes is set in New Zealand not on the international market.

“This law will support investment in new homes, particularly apartments and homes available to purchase under innovative new models, which will help more New Zealanders achieve the Kiwi dream of home ownership.”

Those who hold New Zealand residence-class visas, but don’t live in the country, will be able to apply to the Overseas Investment Office (OIO) for consent to buy an existing home. Those who hold temporary visas, such as visitor, student, working holiday, or work visas, generally will not be able to buy.

There has been widespread concern over the growth in property prices, particularly in the major cities, with many complaining that first-time buyers were being prevented from getting on the housing ladder due to foreign buyers investing in stock and inflating values.

Home ownership rates are at a 66-year low, with just 63.2% of New Zealanders living in their own home and 33% renting.

But government data suggests just 3% of homes were purchased in the first quarter of the year by foreign nationals, led by residents from China, Australia and the UK. However, in Auckland, the figure rises to nearer 6%.

The national average asking price is currently $652,894 in August 2018, according to the Realestate.co.nz website, just short of February’s $673,659 high.

As well as affecting foreign buyers, the new legislation will also affect international developers and investors.

There will be new opportunities for overseas developers to apply to the OIO for consent to buy residential land to build apartments and hotels etc, but they won’t be able to live in these.

All developers with more than a quarter overseas ownership will need consent to buy residential land for new development, although there are more relaxed regulations for large-scale projects.

Those who are investing in an entity that has acquired residential development land in New Zealand may require consent, especially if they are looking to have more than 25% ownership.

Among those opposing the new regulations is the Real Estate Institute of New Zealand (REINZ) Chief Executive Bindi Norwell says, "We don't believe that banning foreign buyers from purchasing property in New Zealand is going to have any impact on house prices, nor will it help young people into their first homes.”

The RBNZ says it remains uncertain how persistent the slowing in the housing market will be and the degree to which affordability constraints will limit future house price inflation.
 
Auckland Houses and Flats - Halo Financial

Just 200 days to go until Brexit!

There are now fewer than 200 days to go until Brexit and still no-one really knows under what terms Britain will leave the European Union.

Speculation swings wildly. On the one hand, chief negotiator for the EU, Michel Barnier, offered a glimmer of hope for a deal by hinting that there could be a trade deal reached in line with the £39 billion ‘divorce’ payment from the UK to the EU. He says it is "realistic" to expect an agreement by early November at the latest.

While on the other, UK Prime Minister, Theresa May, has been warned that up to 80 Conservative MPs could oppose her Chequers plan for future relations with the EU in a Commons vote.

Meanwhile, former foreign secretary, Boris Johnson, and potential leadership candidate is waiting in the wings if Mrs. May should lose a confidence vote. Mr. Johnson hit out at the Chequers plan, controversially describing it as putting a "suicide vest" around Britain.

However, in a poll of 1,500 people a few days later for The Independent newspaper, more people preferred Mrs. May as Prime Minister than Boris Johnson.

Sterling was also boosted by positive economic data, including the strongest growth of 2018. In the three months to July 2018, growth rose to 0.6%, up 0.2% from the previous quarter, according to Office for National Statistics data.
 
Guidance for NZD buyers

Finally, the GBPNZD rate has broken out of the wedge pattern it’s been in since late 2017. It’s been bouncing between 1.89 and 1.96 level for the last few months and it was eventually going to break out of either the top or bottom or the wedge. Had it broken to the downside, it would have opened up a fall to 1.80; fortunately for our NZD buyers, it’s broken to the upside and I believe the initial target should be 2.03-2.04 (these are the midmarket rates, so that’s not factoring in the spread that will be dependent on the amount you are converting. Please do bear that in mind if you wish to place automated orders).  

On the longer term weekly chart it also supports the likelihood of a rally up a few more cents from the current 2.00 level. The relative strength indicator suggests that the Pound is overbought in the short term, so we could see prices drop back to the 1.95/1.96 breakpoint initially. In the bigger picture, if Michael Barnier makes more positive noises about reaching a Brexit deal, we could see a break up through 2.04 level to the next key level (a 50% retracement of the move from the 2015 high at 2.5184 to the 1.6476 low in 2016), which comes in at 2.08.

A word of caution, we can’t get too comfortable with a stronger Pound while so much uncertainty is still at play. You may wish to consider buying some NZD at around 2.00-2.03, more on a break through 2.04, and place a Stop loss order at 1.9500 as a safety – just in case it all goes downhill again…

Guidance for NZD sellers

Short term, we could see the Pound strengthen further by another 3-4 cents, so it would be worth placing a Stop loss order above 2.04 and look to target 1.97-1.98 on a correction lower. A break below 1.95 and it’ll fall to the bottom of the channel, which comes in at 1.92. There’s still a long way to go before we know what type of Brexit we’re going to get, so expect more ups and downs in the coming weeks!

GBPNZD - Research Report Chart - September 2018
 
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