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- NZD rises across board as GBP slumps on poll shift.
- NZD scores as strong retail sales boost growth outlook.
- And see markets reduce bets on more RBNZ rate cuts.
- As GBP slumps amid Tory poll retreat, opposition gains. .
- GBP downside risks growing as election polls tighten.
The Pound was bottom of the barrel of major currencies Tuesday and the New Zealand Dollar riding high as investors dumped the British currency in response to the latest pre-election polls while bidding the Kiwi higher in the wake of a strong retail sales report that sent rate cut speculators into retreat.
New Zealand's Dollar rallied into the morning session after retail sales were revealed to have risen 1.6% in the third-quarter when financial markets were looking for only a 0.5% increase to follow on from an earlier 0.2% gain. However, the more important core retail sales measure was even stronger.
Core retail sales, which remove car purchases from the figures because of their distorting impact on underlying trends, rose by 1.8% in the three months to the end of September while markets were looking for only a 0.6% increase. That followed a 0.3% gain in the prior period.
"Our ASB colleagues caution that high household indebtedness, moderating population growth and a limited household saving buffer will constrain consumption growth going forward. Nonetheless, the Q3 retail sales suggest upside risks to New Zealand Q3 GDP forecasts and highlight that additional RBNZ rate cuts could be further delayed," says Kim Mundy, a strategist at Commonwealth Bank of Australia (CBA).
Markets and economists care about the retail figures because they reflect rising and falling demand in an economy where household spending accounts for a substantial portion of overall 'final demand'. The momentum behind the trend in that demand is important for the inflation outlook, which has implications for interest rates, exchange rates and all financial markets.
Above: Pound-to-Kiwi rate shown at hourly intervals alongside 2-year British government bond yield (orange line, left axis).
New Zealand's Dollar has weakened throughout 2019 as markets moved to price-in a series of interest rate cuts from the Reserve Bank of New Zealand (RBNZ), which has been attempting to stimulate Kiwi economic growth with lower borrowing costs in the hope of one day seeing inflation rise back above the midpoint of the 1%-to-3% target range. It has cut Kiwi borrowing costs three times this year, taking the cash rate down to 1%, but surprised markets this month by eschewing a rate cut.
"Pricing for a December rate cut eased from 33.8% on Monday to 29.2% after the Q3 retail numbers. Diminishing expectations for near‑term RBNZ rate cuts will continue to support NZD," says CBA's Mundy. "We expect GBP to continue to trade in a narrow range in the absence of any UK election news because we are now just over two weeks away from the 12 December general election."
New Zealand's Dollar was higher against half its major rivals Tuesday as investors further priced-out the prospect of another RBNZ rate cut this year. Some say that with the bank only a handful of additional rate cuts away from the zero threshold, it could wait a while before cutting again for fear of using up its last remaining policy bullets unnecessarily. Meanwhile, Pound Sterling was in retreat in response to the latest general election opinion polls.
More polls showed the Conservative Party lead over the opposition Labour Party narrowing on Tuesday, with the latest coming from Kantar who said support for the Tories declined two points heading into the weekend and that Labour managed to add five points to its poll score. The governing Conservatives are now on 43% and the opposition some 32%.
Above: NZD/USD rate shown at daily intervals.
"A surprise Labour win could send UK equities tumbling, despite a softer Brexit," says Jonas Goltermann at Capital Economics. "Labour’s manifesto is one of the most radical by a major party in a developed economy for several decades. While the party remains well behind in the polls, and the betting markets put the chances of an outright Labour majority at just 3%, there is a decent chance of a minority or coalition government led by Labour."
Capital Economics said Friday a Labour election victory would send the Pound to 1.20 against the U.S. Dollar, a level not seen since the early days of Prime Minister Johnson's leadership when fears of a 'no deal' Brexit were at fever pitch. That would put the Pound-to-Kiwi rate at 1.87, down from 2.00 Tuesday, if the NZD/USD rate was to still be trading around its current 0.6417 level on December 13 when the election result is announced.
A Conservative majority would likely mean the agreement struck by Boris Johnson in October takes the UK out of the EU but locks it into 'transition period' as the future relationship is negotiated. Crucially for markets, this would negate the threat of a 'no deal' Brexit, while electoral victory would spare the economy and Pound from years more of indecision and delay, if not worse, under an anti-Brexit opposition Labour Party government.
"1.9663 is our pivot point. Our preference: as long as 1.9663 is support look for 2.1536. Alternative scenario: the downside breakout of 1.9663 would call for 1.8993 and 1.8594," says Remy Gaussens, head of research at Trading Central.
Above: Pound-to-Kiwi rate shown at daily intervals alongside 2-year British government bond yield (orange line, left axis).
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