- Stronger economy and inflation lessens rate cut fears
- New Zealand unemployment rate at 10-year low
- UK Prime Minister May ‘confident of Brexit deal’
GBP has fallen from its annual high of 2.0459 against NZD in typical mid-market rates at the start of October to 1.93746 following the ‘end of austerity’ UK budget and downgrading of UK 2018 economic growth. During early November, the pair initially traded around 1.95-1.96, before again slipping to around 1.93, with a series of good news about New Zealand job creation, economic growth and inflation. Any firm decision on Brexit could see the Pound strengthen again and start climbing back to the heights of the 2.00 level.
Stronger economy and inflation lessens rate cut fears
Rising inflation combined with strong economic growth may have seen off the possibility of the next New Zealand interest rate move being down. The Reserve Bank of New Zealand (RBNZ) sounded more bullish in its latest Official Cash Rate (OCR) statement for November 2018. Two or three months ago, both Governor Adrian Orr and Deputy Governor John McDermott suggested that interest rates could lower unless the growth picked up, preferably towards the higher end of the bank’s 1-3% target. The bank still says that, “As always, the timing and direction of any future OCR move remains data dependent.”
However, with economic growth and inflation both strengthening, the possibility of a future cut in rates is abating. September’s quarterly Consumer Price Inflation jumped 0.9% to reach an annual rate of 1.9%, largely due to increased petrol prices, which rose 19% in September. In June, the annual inflation rate was 1.5%. Even though the RBNZ kept the Official Cash Rate (OCR) at 1.75% and signalled it expected not change until 2020, the tone of the bank was a little more upbeat than previously.
While the 1% uplift in Gross Domestic Product (GDP) in the June quarter to an annual 2.7% was partly due to temporary factors, the bank is expecting GDP to continue to rise. It is currently at 2.8% a year. Adrian Orr says, “GDP growth is expected to pick up over 2019. Monetary stimulus and population growth underpin household spending and business investment. Government spending on infrastructure and housing also supports domestic demand. The level of the New Zealand Dollar exchange rate will support export earnings.” That, in turn, is expected to further boost inflation, he explains. “As capacity pressures build, core consumer price inflation is expected to rise to around the mid-point of our target range at two percent.”
There were both risks of inflation rising and falling. “Weak business sentiment could weigh on growth for longer. Trade tensions remain in some major economies, raising the risk that trade barriers increase and undermine global growth. “Upside risks to the inflation outlook also exist. Higher fuel prices are boosting near-term headline inflation. We will look through this volatility as appropriate.”
The RBNZ says a strengthening economy will help boost inflation, which could hit 2.1% by December 2020 and 2.3% the following year, it predicts. “Higher petrol prices have pushed inflation close to our two percent target, but growth in other prices is still low. We think that economic growth needs to increase to sustain inflation at two percent. “Stronger economic activity in New Zealand will increase price pressure. Wages should rise as businesses struggle to find workers who are not already employed.”
As a result, Mr Orr concludes, “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.” The comments pushed the Pound down against the New Zealand Dollar on the day to around the monthly low.
New Zealand Unemployment rate at 10-year low
The jobless rate in New Zealand, which was already doing well, came down by even more than expected in the three months to September 2018 – reaching a decade low. The Quarter 3, 2018, unemployment rate fell from 4.4% year-on-year to 3.9%. For women, the unemployment rate fell to 4%, down from 4.6% the previous quarter. For men, the unemployment rate fell to 3.9%, down from 4.2%.
In the last year, the largest occupational increases in employment were for professionals (up 33,000) and clerical and administrative workers (up 23,200). In both cases, the increases came mainly from women. At the same time, there was a huge rise in the employment rate of 2.8% year-on-year, which meant 73,000 more people are in work than at the same time last year. To cap the good news, the number of people seeking work increased 0.2% to 71.1% and average hourly wages rose 1.8% annually to $31.34, which is 0.6% more than expected. All this strengthens the New Zealand Dollar.
UK Prime Minister May ‘confident of Brexit deal’
With just four months to go until Britain is set to leave the European Union, at long last, a Brexit agreement looks within reach. Over the last few months, GBP has been dragged up and down by rumours of success and failure in reaching an agreement with the European Union over the exact terms of the exit on 29 March 2019 and relief at avoiding the uncertainty of a no-deal Brexit. Now, a deal is close – there are calls from MPs of all sides to see the legal advice concerning the last major stumbling block – finding a way of maintaining an open border in Ireland once Britain leaves the EU. The advice was requested by the UK’s Prime Minister, Theresa May, and has been drawn-up by attorney general Geoffrey Cox.
At present, the UK and Ireland are both part of the EU market and customs union, so there is no need to inspect goods and products. But after Brexit, Ireland and Northern Ireland may be subject to differing customs regulations, which would require border checks. MPs want to understand the implications of any backstop deal, but Downing Street says the government does not normally discuss such legal advice. However, former Brexit Secretary, David Davis, says if Mrs May’s Brexit deal comes before the Commons, she is probably going to lose the vote. On the other hand, Foreign Secretary, Jeremy Hunt, says he is confident of a deal being reached before the end of November. Having survived the perils of the Tory conference and whispers of leadership challenges, Prime Minister, Theresa May, is also reportedly confident of soon reaching a deal with Europe. However, she says this will “not be done at any cost” to the UK. Should an acceptable deal be reached between Britain and the European Union, then the Pound is likely to receive a boost against the NZ Dollar, even if only temporarily. The UK Budget in late October, announcing the end to austerity, brought a boost in spending and a change in growth forecasts, bringing the Pound to a monthly low against the kiwi. UK growth in 2018 was forecast to be 0.2% lower than expected at 1.3%, due to impact of bad Spring weather. But the 2019 forecast was raised 0.3% to 1.6%, with 2020 and 2021 growth estimated at 1.4%, 2022 at 1.5% and 2023 at 1.6%, UK Chancellor Philip Hammond announced.
Guidance for NZD buyers and sellers
The last few months has seen the Pound break higher against the NZ Dollar, hitting a two year high at 2.0480 in early October, then sell off aggressively losing 12 cents over the next few weeks and back into the 1.90-1.96 trading range that it’s been stuck in for the best part of a year. I was hoping that when the decisive break above 1.96 occurred in early September it would rally up to 2.04 initially, then onto 2.08, but sadly it didn’t make the higher target.
Brexit questions over the Irish backstop, which have been a sticking point for the last two years, remain; and with that, the Pound suffers on downbeat no-deal Brexit comments. That said, the market expects that a deal will be forthcoming and we keep hearing squeaks out of the UK government that it’s only weeks away. Short term, the Pound needs to hold above 1.92 to remain in the current channel, if it breaks below that, it would trigger a move down to 1.89/1.90 and conversely, if it bounces from here, then 1.9550 is the initial target.
It might be worth placing orders at 1.94 and then again at 2.00 for the break up through 1.96 in the event of Brexit good news (oxymoron anyone?!) Get in touch to see where the land lies…
Article supplied by Halo Financial, November 2018.