NZ Economic Update: Uncertainty a key theme for some time yet

ASB Header 04 July 2016 II

Key highlights:

  • The low sentiment and volatility remains a key theme as markets struggle with the uncertainty created by Brexit.
  • Closer to home, there is also political uncertainty surrounding the Australian election outcome.
  • This week, the data releases pick up again both here and overseas after a quiet few weeks.

We have now had just over one week to digest the UK’s decision to leave the European Union. One week on, low sentiment and volatility remain key themes in markets as many questions remain unanswered and markets hate uncertainty. Globally, sharemarkets remain subdued and while we have seen a degree of recovery in some equities, the majority remain below their pre-Brexit levels. The Pound also remains weak, with the NZD/GBP still near historical highs. There’s a similar risk-off trend in bond yields with US and UK 10-year government bond yields remaining near historical lows.

Political uncertainty in the UK will also remain a key driver of uncertainty over the next few months. Boris Johnson, the assumed front-runner to take over from David Cameron, lacks support and has stated that he will no longer run. This has thrown new leaderships questions into the mix. And political uncertainty is no longer constrained to the UK as Australia’s election results so far are anything but clear. The Liberal Coalition led by Malcolm Turnbull is well short of the required number of seats to govern alone and there has been more talk of a leadership coup, which has seen the NZD/AUD as high as 0.9637. But, the votes haven’t all been counted yet and so we are forced to wait until Australia reconvenes counting votes on Tuesday.

Amidst all the excitement of the last week, we have revised our currency forecasts to reflect the post-Brexit world. While we have left our NZD/USD and NZD/AUD forecasts unchanged, there have been large revisions to our NZD/GBP forecasts. We now have our NZD/GBP forecast lifting to 0.6200 by the end of 2017, up from the 0.4700 we had previously forecast. Our NZD/JPY forecasts have been revised lower in the short term and NZD/EUR forecasts have been revised slightly higher.

In other political news, the NZ Government announced over the weekend a new $1 billion dollar fund to support housing developments in certain areas. Those areas highlighted include Auckland, Hamilton, Tauranga and Wellington. The fund is aimed at covering infrastructure development as well as to speed up the consent processes. This fund is likely to come under even more scrutiny this week as the next round of housing data is released for June. data were released this morning and we are also expecting releases from Barfoot & Thompson, QV and maybe REINZ (although that could be the following week).

The housing data due out this week reflect the end of the data void we experienced leading into and directly after Brexit. This week we also have the Q2 Quarterly Survey of Business Opinion (due tomorrow) and a GlobalDairyTrade Auction on Tuesday night. Globally, the Reserve Bank of Australia meets tomorrow, but no change is expected. The main event on the global calendar, however, will be Friday night’s US Non-farm Payrolls.


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