New Zealand Dollar (NZD) exchange rates plunged sharply on Thursday after the surprise announcement that Labour and New Zealand First will form the next government.
This disappointed markets who had hoped that Bill English’s National party would have been able to remain in power, in spite of the inconclusive nature of the recent election.
Investors are wary of the political uncertainties that this new coalition brings to the table, especially with regards to its economic policies and the potential implications for the Reserve Bank of New Zealand (RBNZ).
As a result the ‘Kiwi’ is likely to remain on a generally softer footing in the days to come, limiting the downside potential of the GBP NZD exchange rate.
Easing Brexit Worries Boost Pound Sterling
Pound Sterling (GBP) exchange rates found renewed support ahead of the weekend as Brexit negotiations showed some small signs of progress.
Markets greeted news that EU leaders have agreed to begin internal talks to prepare for the second phase of negotiations, even though this is not quite what the UK government had been hoping for.
While it still remains questionable whether the next phase of talks – regarding a future trade deal and transition period – will get the go-ahead before the end of the year, this was still enough to boost GBP exchange rates.
A better-than-expected UK public sector net borrowing figure also shored up Sterling on Friday morning, as this showed the smallest September deficit since 2007.
As a result Chancellor Philip Hammond looks on course to meet his government borrowing target for the 2017-2018 fiscal year, even if he still faces very little room for manoeuvre in his November budget announcement.
GBP NZD Gains Possible on Bullish UK GDP Reading
Increased volatility is expected for the GBP NZD exchange rate on Wednesday, with the release of the third quarter UK gross domestic product report.
While growth is forecast to have held steady at 0.3% on the quarter, this may not be enough to keep the Pound on a stronger footing against its rivals.
Any signs that the economy is losing momentum could weigh heavily on Sterling, especially if the uncertainties over the future of the UK post-Brexit remain.
If economic activity shows signs of flagging then markets could be inclined to revise the odds of a November interest rate hike from the Bank of England (BoE).
With some policymakers having expressed misgivings over the wisdom of imminent monetary tightening a rate hike is still far from a gone conclusion.
Unless growth betters forecasts then the GBP NZD exchange rate could come under pressure from increasing market jitters in anticipation of the November policy meeting.
Narrowed Trade Deficit May Support NZD
Something of a rallying point could be in store for the New Zealand Dollar if September’s raft of trade data proves positive.
After the sharp widening of the trade deficit seen in August, markets will be hoping to see some form of recovery, with forecasts pointing towards a significant narrowing of the deficit.
This could bolster confidence in the underlying health of the New Zealand economy, in the short term at least.
However, regardless of the nature of this data the mood towards the ‘Kiwi’ is likely to remain somewhat muted thanks to market worries over the shape of the new government.