Brexit dominates the day – and week, month, quarter…
Like most other Sterling pairings, GBPNZD has been dominated by the ups and downs of Brexit – with British MPs still undecided about what to do as of the end of March, when Britain was supposed to leave the European Union. So it looks as if the issue will continue to affect the Pound against the NZ Dollar over the next three months, as will the choice of the new UK Prime Minister, if Theresa May does step down.
The worries for the New Zealand Dollar are mostly on the economic front, with the Reserve Bank now hinting at a rate cut. The outcome of the US-China trade talks will also play an important part in the kiwi’s fortunes from April-June.
Since our last quarterly report, the Pound rose from a low of 1.873 against the New Zealand Dollar in typical mid-market rates. This was on 15 February after the Reserve Bank of New Zealand hinted it was not ready to cut rates. The high of 1.951 came on 28 February on fears over cuts in New Zealand interest rates and fresh hopes that a no-deal Brexit could be avoided. Following the defeat of Theresa May’s third Brexit withdrawal agreement on 29 March, the pound fell to around 1.908.
The worries for the New Zealand Dollar are mostly on the economic front, with the Reserve Bank of New Zealand (RBNZ) now hinting at a rate cut. The outcome of the US-China trade talks will also play an important part in the Kiwi’s fortunes from April-June 2019.
Since our last quarterly report, the Pound rose from a low of 1.873 against the New Zealand Dollar in typical interbank rates. This was on 15th February, after the RBNZ hinted it was not ready to cut rates. The high of 1.951 came on 28th February on fears over cuts in New Zealand interest rates and fresh hopes that a no-deal Brexit could be avoided. Following the defeat of Theresa May’s third Brexit withdrawal agreement on 29th March, the Pound fell to around 1.908.
Cut in New Zealand interest rates now likely
At the end of March, the RBNZ took the market a little by surprise by stating that it believed interest rates could fall. While keeping the Official Cash Rate (OCR) at 1.75% for the time being, Governor Adrian Orr says, “Given the weaker global economic outlook and reduced momentum in domestic spending, the more likely direction of our next OCR move is down.” This sent the NZD falling against key partner currencies.
Some market commentators now predict that the Reserve Bank of New Zealand will now cut the rate by a quarter point in May and another later in 2019. The RBNZ says employment is near its maximum sustainable level, but core consumer price inflation remains below the 2% target mid-point, which means supportive monetary policy is still needed. “The global economic outlook has continued to weaken, in particular amongst some of our key trading partners including Australia, Europe, and China. This weaker outlook has prompted central banks to ease their expected monetary policy stances, placing upward pressure on the New Zealand Dollar.”
Low interest rates, and continued employment growth, should support household spending and business investment, the bank says. Government spending on infrastructure, housing, and transfer payments also supports domestic demand. As capacity pressures build, consumer price inflation is expected to rise to around the mid-point of its target range. However, “The balance of risks to this outlook has shifted to the downside. The risk of a more pronounced global downturn has increased and low business sentiment continues to weigh on domestic spending. On the upside, inflation could rise faster if firms pass on cost increases to prices to a greater extent. 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.”
US-China trade talks ‘constructive’
As US-China talks resumed at the end of March to end the damaging trade war, US Treasury Secretary, Steven Mnuchin, said the discussions in Beijing had been “constructive”. The hope is that talks set to follow in Washington will also be constructive. Any positive outcome is likely to benefit the NZ Dollar over the next three months.
China is New Zealand’s number one trading partner for both imports and exports with two-way trade valued at over 28 billion NZ Dollars in 2018. The US is New Zealand’s third-largest individual trading partner. However, the positive news about the talks was not enough to immediately strengthen the New Zealand Dollar against the Pound, which was more focused on the latest Brexit votes. Previously, the United States and China agreed to put any new action on hold for 90 days, until 1st March 2019, so they could talk further.
In the event, they missed the deadline, but agreed to continue talking. President Trump had previously been planning to increase tariffs on 200 billion US Dollars of Chinese goods from 10% to 25%. So far, the US has imposed trade duties on 250 billion US Dollars’ worth of Chinese goods in retaliation for “unfair trade practices”. China added import duties on US products worth 110 billion Dollars.
NZ-China talks to cement relationship
In early March, New Zealand Prime Minister, Jacinda Ardern, is meeting Chinese Premier Li Keqiang after a bid by Chinese telecom firm Huawei to create a 5G mobile network was refused. The intelligence agency rejected the bid due to security fears.
Mr Li called on New Zealand to ensure there is a fair investment environment. He said, “At present, China-New Zealand ties overall are developing in a stable manner. China also places a high importance on relations with New Zealand and is willing to. And we hope that we can aspire to the greatest common denominator regarding each other’s interests and that when each side’s businesses invest in each other’s businesses, they can enjoy a fair, transparent, convenient environment.”
Ms Ardern says New Zealand greatly values trade with China. “It is one of our most important and far reaching relationships. We already enjoy a relationship with an impressive and innovative history and a very impressive future.”
Business confidence slows again
After a brief rise, business confidence is slowing again in New Zealand. Sentiment slipped in March over economic fears, according to the ANZ Business Outlook Survey. It showed a net 38% of respondents expected the economy to deteriorate over the year ahead, up considerably from 30.9% in February. A net 1% of firms expect to increase investment, down 1% from previously. Employment intentions fell two points to a net 1% and profit expectations fell three points to a net 14% expecting profits to fall.
Meanwhile, New Zealand small business confidence is below the Asia-Pacific average, according to the 10th annual Certified Practising Accountants (CPA) Australia Asia-Pacific Small Business Survey. It shows 57.4% of New Zealand businesses grew in the calendar year, against survey average of 66.3%. At the same time, 63.2% of businesses expect to grow in the next 12 months. The survey average is 68.8%.
Fresh Brexit defeat on Leave Day
On the day that Britain was supposed to be leaving the European Union, Members of Parliament ruled out Prime Minister Theresa May’s Brexit withdrawal agreement for the third time. In a desperate attempt to gain some momentum, Mrs May split the withdrawal element of her deal from the political part. But MPs still voted the ‘blind Brexit’ deal down by 344 votes to 286 – a majority of 58. This sent the Pound immediately falling against the New Zealand Dollar to 1.908 in typical mid-market rates.
There are now fears that with the UK set to leave the EU on 12th April at the time of writing, there is not likely to be enough time to legislate for a deal. If the UK wanted a further extension, it would need to hold European elections, says Mrs May. “The implications of the House’s decision are grave. The legal default now is that the United Kingdom is due to leave the European Union on 12th April.
An emergency EU summit has been hastily arranged for Wednesday 10th April. The European Commission says, a ‘no deal’ scenario on 12th April is now a likely scenario.” In a bid to finally get her EU withdrawal agreement approved, Mrs May put forward the withdrawal agreement part of her Brexit deal without the political declaration. Even so, the European Commission said that, had the deal passed, the UK could leave the European Union without passing the political declaration.
British business bites back
British business leaders again condemned the situation as “a failure” and “a disaster” for the UK economy and jobs. Mike Cherry, the chairman of the Federation of Small Businesses (FSB), says, “On the day that we were supposed to be leaving the European Union, all we have is yet another political failure to chalk up. Responsibility for this deepening political crisis lies squarely at the feet of politicians who have clearly stopped listening to the business community.
Stephen Phipson, Chief Executive Officer of the manufacturers’ organisation, Make UK, says, “This now makes the nightmare of a ‘no deal’ scenario more likely than ever. This would be a disaster for the UK economy as a whole and for the 2.7 million manufacturing jobs around the UK.”
More indicative votes are taking place in early April in a bid to break the deadlock.
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What’s next for GBPNZD?
Even though we have now passed the date when the UK was supposed to leave Europe, Brexit is likely to remain the major focus for Sterling over the next quarter. Interest rates, the economy and US-China trade talks are set to be major issues for the New Zealand Dollar looking ahead.
Guidance for NZD Buyers
GBPNZD is still in an uptrend from the turn of the year, trend line support comes in at 1.9000 at the moment, so as long as the market stays above this level, there is a good chance that the currency pair will head higher. That being said, there is chart resistance, which has held on a handful of occasions at 1.9500/50. A break of here would suggest a quick move towards 1.9800.
Guidance for NZD Sellers
GBP/NZD is struggling to break convincingly above 1.9500. Protection should be left above that level. If that holds again then it would be prudent to reduce any exposure close to the 1.9000 trend line support.
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