By Phil Lynch
This week brings us one of the most anticipated events in 2019 – the vote on Theresa May’s Brexit deal ahead of their exit from the EU on 29 March. It is not looking good for Britain – and kiwi businesses should be cautious of possible contagion effects in markets that could dramatically impact the value of the New Zealand dollar (against all currencies – not just Sterling). Here is a rundown and timeline of what to expect.
It is well worth noting that neither the EU or the UK prefer a ‘hard’ Brexit, given the chaos it would cause. However this week we have three key votes in the UK Parliament.
France’s EU affairs minister Nathalie Loiseau may have summed it up best and did not see any value in extending the window for talks.
“More time, to do what? We’ve had two years … If there’s nothing new, more time will not do anything other than usher in more uncertainty, and uncertainty just creates anxiety,” Loiseau said. “It’s not time that we need, but a decision.”
I tend to agree. An extension will likely bring more chaos – and will likely see an end to Theresa May through a General Election. Although there is some talk of a second referendum.
Regardless of the currency pair you are exposed to – the time is right to check your cover levels in place are appropriate.
Although unexpected, there is a chance of this deal succeeding – which will completely change the conversation. This would mean Britain go ahead and leave the EU on March 29 with a deal in place. It is probably the cleanest, simplest, and most beneficial scenario that anyone can hope for. This could be promising for the NZD.
If the Brexit vote goes pear-shaped, which is currently the leading expected outcome, then markets will have to contend with heightened uncertainty and risk, and traditionally this has had a huge impact on the NZ dollar.
Britain is the fifth largest economy in the world, and even the Bank of England has warned of a dramatic recession that could ensue if Britain leaves with no deal. This could lead to a massive contagion effect, and anything in financial markets that is sensitive to risk would be caught up.
It has been exactly 10 years since markets reached their low point following the Global Financial Crisis (GFC). The NZDUSD fell 40% in just 12 months during the GFC. So there are genuine risks that the risk-sensitive New Zealand dollar gets caught in more dramatic moves ahead.
Of course, it is not all about Brexit, and there is plenty going on further afield. Unfortunately, the economic news has not been good. Last week saw the number of new jobs created in the US come in at only 20k, vs expectations of 180k. We also had week data out of Australia, particularly with their year on year GDP numbers coming in at 2.3% vs expectations of 2.6%. The ECB rounded out the week by downgrading their growth and inflation forecasts.
This week is light on New Zealand data, but does include several key announcements from offshore. The highlight for me will be US CPI and Retail Sales data early tomorrow morning – which will continue to paint a picture of how the US economy is doing.
Once again, the NZDUSD range of 0.67 – 0.69 has held together, and the kiwi opens this week towards the middle of that range. Importers are doing well topping up towards the upper end of that range, whilst exporters are doing well topping up towards the low end of that range.
Longer term, there are still several risks to the kiwi that leaves me feeling bearish. Political risks in the US. Chinese economic slowdowns. And of course, Brexit related risks. For discretionary cover, an importer may well be looking to top up higher than normal levels as a safety net against these potential risks.
We are now just 3.5 cents away from a ‘Parity Party’, where the kiwi reaches the 1 to 1 level with the Aussie. Whilst the Aussie economy is continuing to make this look possible, there is stiff resistance to this level in markets. The NZDAUD has been at these levels before and often reversed quickly.
The kiwi has never sustained a push above 0.9600 in the past, and when I look at my long-term NZDAUD chart, there has not been a single year where the NZDAUD has stayed above 0.9000 for the entire year.
For this trend to turn around, either the NZD will need to devalue or the AUD increase in value. Both of these events are now likely in my opinion. The chart below shows the NZDAUD since the kiwi floated. Each bar or ‘candle’ shows the trading range in a year, and you can see just how extraordinary these levels are. Click the chart to enlarge.
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