Pound-New Zealand Dollar Rate Whip-saws on Brexit Bluster and Noise as Risks Shift to the Upside

-GBP volatile as Brexit noise rises with talks on home strait.
-EU beats chest as both sides covet semantic political victory.
-Threatens European Court case for Brexiting UK over IMB.
-Mood in London improves as negotiators begin to talk trade. 
-Brexit trade deal could see GBP/NZD back up near to 2.0.

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  • GBP/NZD spot rate at time of writing: 1.9498
  • Bank transfer rate (indicative guide): 1.8665-1.8800
  • FX specialist providers (indicative guide): 1.9052-1.9168
  • More information on FX specialist rates here

The Pound-to-New Zealand Dollar rate was volatile Thursday after a jittery market was spooked away from Sterling by a perceived deterioration of the odds for a Brexit trade deal that has obscured a reorientation of the talks and a shifting balance of risk that could now be to the upside.

Sterling whipsawed Thursday after the European Commission took the first step in a so-called infringement procedure against a Brexiting United Kingdom in protest over Prime Minister Boris Johnson's Internal Market Bill. 

Action against the UK was announced by EU chief executive Ursula Von der Leyen and served to exacerbate an existing sell-off that appeared to result from a Reuters report suggesting that Brexit trade negotiations are again on the rocks ahead of the weekend with barely more than fortnight left on the clock before a self-imposed mid-October deadline for terms to be agreed. 

Above: Pound-to-New Zealand Dollar rate shown at 15-minute intervals.

The rub for those in the sell-Sterling camp is that Thursday’s infringement procedure simply threatens a lawsuit in a court that isn’t intended to have any jurisdiction over the UK beyond December 31. The European Commission is effectively beating on its chest in pursuit of a semantic political victory. In addition, Reuters’ since-updated report that trade negotiations are on the rocks was originally built on the testimony of an anonymous official merely “following” the talks rather than being involved in them. 

"The real risk is that the UK and the EU completely fall out. The UK could override part or all of the Withdrawal Agreement, the EU could respond by starting legal proceedings and few measures could be implemented to mitigate the disruption on 1st January 2021,” says Paul Dales, chief UK economist at Capital Economics. “In such “uncooperative no deal”, the pound may fall to $1.10, inflation may rise to a peak of 4.1% and GDP may be 2.5% lower in 2021 as a whole than if there was a deal. The acrimony would probably continue beyond 2021 too, which may lead to fewer agreements in the future and the expiry of any temporary measures. Relative to the 26% slump in GDP endured during the COVID-19 crisis, any hit from a no deal would be small."

This was all after the controversial Internal Market Bill cleared the House of Commons and first stage of the legislative process, taking it into the opposition-dominated House of Lords where it is expected to receive pushback that could prove to be insurmountable in the absence of a bid by Downing Street to gerrymander the often-controversial upper chamber, the composition of which is determined by government appointment.

More importantly, Thursday’s developments have diverted attention away from an agreement with Norway on fisheries that paves the way for a broader tripartite pact between the two parties and the EU, which could effectively facilitate a covert compromise on Brussels' demand that it be able to ‘cherry pick’ aspects of UK membership that it seeks to retain after year-end.

Above: Pound-to-New Zealand Dollar rate shown at daily intervals.

“GBP is underperforming across the board. Reports of ongoing Brexit talk impasse and confirmation the European Commission is about to start legal proceeding against the UK for breaching the terms of its withdrawal agreement (via the controversial Internal Market Bill) are weighing on GBP,” says Elias Haddad, a strategist at Commonwealth Bank of Australia. “Any sign of a breakthrough in talks will lead to a broad‑based relief rally in GBP.”

There’s reportedly an increasingly optimistic mood in London.

Most importantly for the outcome of the trade talks and the outlook for Pound Sterling is the evolved orientation of the negotiators, who’re actually soon to talk about trade rather than simply butt heads over political red lines. 

The final stage of this week’s technical negotiations wraps up on Thursday, although the talks are officially scheduled to culminate on Friday with a meeting of the chief negotiators. 

“Brussels said it would be taking legal action on the UK's Internal Market Bill, which passed the Commons this week with a majority of 84. But the most telling thing is that EU negotiators haven't walked away from the talks,” says Stephen Gallo, European head of FX strategy at BMO Capital Markets. "A deal will get done, but the aforementioned issue is one of many reasons why the eventual relief rally in the GBP should probably be faded." 

Above: GBP/NZD at weekly intervals. Has bounced off major Fibonacci retracement & 200-week moving-average (black line).

Red lines are embedded in differences over fisheries access and the EU’s demand for a set of 'level playing field' terms that are a gambit for continued control over UK economic policy under the guise of ensuring “open and fair competition,” one part of which involves so-called state aid policies. 

Government-friendly political pundits have recently doubted aloud that post-Brexit life would really be quite so bad if the country was subordinated to the EU’s regime in that area. 

Thursday’s developments have all the hallmarks of Brexit bluster and noise, with none of them taking away from the appearance that the balance of risk in the trade negotiations has shifted decisively to the upside. As a result, those betting against the Pound may be at risk of losing shirts sooner or later. 

“The technical picture is now more neutral,” says David Croy, a strategist at ANZ, referring to the Pound-to-New Zealand Dollar rate. 

Major currencies, and especially the ‘high beta’ ones like the Kiwi, Aussie and Canadian Dollars, have followed the S&P 500 in lockstep for months. So too has Pound Sterling although, despite pockets of outperformance relative to other currencies, the British unit’s gains have been less and its losses often larger.

Above: GBP/USD rate shown at daily intervals alongside S&P 500 index futures (green line, left axis).

Sterling’s underperformance has led to a gap between it and the S&P 500 on the charts, in what has all of the hallmarks of a so-called risk premium that is Brexit motivated but which would likely disappear upon a deal.

Closing the gap between the two could see GBP/USD trading between 1.32 and 1.35, with implications for GBP/NZD. 

The Pound-to-New Zealand Dollar rate would rise to 1.9849 if GBP/USD traded up to 1.32 and NZD/USD remained around its Thursday level.

“Local drivers of the NZD are well-known: very easy monetary policy and the promise of more to come, low and flat yield curves, but a gold standard COVID-19 response and commodity prices holding up. Against that we have election uncertainty,” Croy says. “All told, we expect continued trading around our central forecast of 0.65 for the next few quarters.”

GBP/NZD would also rise to 1.9850 in a scenario where GBP/USD hit 1.35, as such an outcome might only be likely in a stock market recovery that would lift NZD/USD back to 0.68, if recent history is anything to go by. 

However, Pound-to-Kiwi gains would be larger in both scenarios if election uncertainty or Reserve Bank of New Zealand monetary policy was to lead NZD/USD back to 0.65 in the months ahead.

Above: NZD/USD rate shown at daily intervals alongside S&P 500 index futures (green line, left axis).