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GBP to NZD Exchange Rate Surges as NZ Election Result Causes Uncertainty

September 25, 2017 - Written by Toni Johnson

Last week’s Brexit news caused the British Pound to New Zealand Dollar exchange rate to plummet, but when markets opened on Monday it was the New Zealand Dollar being sold due to political uncertainties. Markets digested the mixed results of New Zealand’s 2017 general election.

After days of volatile trade, GBP/NZD fell from near the week’s opening levels of 1.8630 to 1.8400 last Friday due to a disappointing Brexit speech from UK Prime Minister Theresa May. The pair recovered on Monday and trended above the level of 1.85 again.

GBP Remains Buoyant Despite Moody’s UK Downgrade

The Pound saw strong performance against many major currencies on Monday despite the latest UK Brexit and economic concerns.

According to analysts, this was likely because most Brexit concerns had already been priced in to the undervalued Pound.

This was the primary reason that investors didn’t react much to news that credit rating agency Moody’s had downgraded Britain’s credit rating, from Aa2 to Aa1.

Alastair Wilson, managing director of global sovereign risk at Moody’s, explained the group’s decision on Friday night;

‘Over the next few years, we have a lot less confidence that the UK’s government is going to be able to fulfil its plans to bring the debt load back down, and this is an extremely high debt load that the UK has, or to be able to achieve some form of agreement with the EU which retains a substantial share of the rights that membership of the EU grants’

The decision was partially inspired by Friday’s Brexit speech from UK Prime Minister Theresa May.

May’s speech caused Pound weakness due to revived concerns about a ‘hard Brexit’ being possible, but on Monday analysts noted that the disappointment was short-lived. MUFG currency analyst Lee Hardman stated;

‘There was some initial disappointment that PM May did not go further in her speech in an attempt to accelerate Brexit negotiations,

Securing a transitional agreement could help to strengthen the Pound and dampen the potential negative UK economic fallout.’

NZD Sold Off Amid New Zealand Election Result Uncertainty

Saturday saw the New Zealand public head to the polls and vote in the 2017 NZ general election.

Opinion polls indicated that the ruling National Party would take the lead and the result wasn’t too surprising.

The National Party won the most votes, gaining 58 seats out of 120, while the main opposition party, Labour, won 45 seats.

This meant that neither party had won enough votes to form a government. As a result, a few weeks of uncertainty are likely to follow as the parties begin discussing possible coalition options.

New Zealand’s nationalist party, NZ First, appeared to hold the balance of coalition talks.

While analysts believe the National Party is more likely to make a deal with NZ First than Labour is, the possibility of an uncertain Labour/Green/NZ First coalition is weighing on the New Zealand Dollar.

Other global factors limiting demand for risk-sentiment have also made the New Zealand Dollar unappealing to investors this week.

Germany’s 2017 federal election ended with a weaker-than-expected win for German Chancellor Angela Merkel and a surprisingly strong performance from Germany’s nationalist party, AfD.

This, on top of persistent geopolitical tensions between the US and North Korea, has weighed on risk-sentiment.

GBP/NZD Forecast: Could Pound Recovery Continue?

Unless the Reserve Bank of New Zealand (RBNZ) surprises with a hawkish tone in this week’s policy decision, the Pound to New Zealand Dollar exchange rate could continue to advance in the coming days.

The undervalued Pound is already being bought from its lows due to risk-aversion, but if upcoming UK data impresses its gains are likely to continue.

Tuesday will see the publication of BBA mortgage approvals from August, followed by Nationwide housing prices from September on Wednesday.

Amid the recent market speculation that the Bank of England (BoE) could be preparing to hike UK interest rates in the coming months, Thursday’s speech from BoE Governor Mark Carney could be highly influential too.

If Carney continues to indicate that tighter policy is on the way and the RBNZ takes a cautious tone on policy, GBP/NZD could surge on Thursday.

On the other hand, if the RBNZ hints towards a more hawkish tone, the ‘Kiwi’ would see a surge in demand despite New Zealand’s political uncertainties, and GBP/NZD would fall.
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