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Pound to New Zealand Dollars Nears 2-Week High, on UK Wages

Market CommentaryPound to New Zealand Dollars Nears 2-Week High, on UK Wages
Pound to New Zealand Dollars Nears 2-Week High, on UK Wages
Pound to New Zealand Dollars.

The pound to New Zealand dollars interbank exchange rate has hit 1.9369 today. This is its highest in near to two weeks, or since May 31st.

By contrast, on June 9th, the GBP was as weak as 1.9096 versus the NZD. So it's since risen by +1.43%, or by +2.75 cents.

To put this into context for you, at today's interbank exchange rate of 1.9369, £250,000 would be worth NZ$484,225.

By comparison, at the interbank exchange rate on June 9th of 1.9096, £250,000 would have been worth just NZ$477,400.

So as the interbank exchange rate has risen, for the same pound amount, that's an increase in the New Zealand dollar total of +NZ$6,825.

This might benefit you, if you're a Briton about to emigrate to New Zealand, or a UK business owner importing kiwi goods or services.

This is because you could now get a higher New Zealand dollar total in your kiwi bank account, compared to if you'd transferred money in the recent past.

In turn, this may make it easier for you to move abroad to New Zealand, or cut your costs for your business when you buy New Zealand goods or services.

A first reason why the pound to New Zealand dollar interbank exchange rate has neared this two-week high is because UK wage growth accelerated in April, said new data yesterday.

A second factor why the GBP has risen versus the NZD is because two executives at the Bank of England have recently suggested that UK interest rates might rise sooner.

However, looking forward, the UK's Brexit uncertainty could continue to weigh on British sterling. This includes the growing risk of a 'No Deal' exit from the EU.

Pound to New Zealand Dollars Rate Rises, as UK Wage Growth Accelerates

A first partial explanation why the pound has neared this two-week high versus the New Zealand dollar is because UK wage growth increased in April, said official data yesterday.

This reassures the financial markets and British investors that the UK's labour market remains robust, in spite of Brexit. In turn, this might help accelerate the UK's economic growth.

According to the Office for National Statistics (ONS) on Tuesday, UK average earnings excluding bonuses rose by 3.4% in the three months to April, compared to a year ago.

This is above economists' forecasts for 3.1%, as well as March's figure of 3.3%. It's also the UK's fastest wage growth in eleven years, since the 2008 global financial crisis.

These upbeat wage growth figures have strengthened the pound, because they suggest that Brits are getting richer. In particular, UK inflation stands at just 2.1% at present. So net wages are rising by a healthy 1.3%.

This will give Britons more cash to spend at the shops, lifting businesses' revenues. This may fuel faster GDP (Gross Domestic Product) growth.

In addition, there was more upbeat UK jobs market data on Tuesday. UK unemployment held at 3.8%, the joint-lowest since the mid-1970s.

The UK's total employment rate reached 76.1%, well above April 2018's 75.6%, and the highest on record. Also, the UK created 32,000 new jobs in April, beating market predictions for a -1,000 fall.

These positive UK wage growth figures suggest that British businesses feel comfortable enough in their financial positions to pay their employees more.

This also suggests that UK unemployment is now low enough that firms are having to pay their workers more to retain them. Both these things point to a healthy economy, thus contributing to strengthen the pound.

GBP to NZD Strengthens, as BoE Signals UK Interest Rate Hike

Also, another reason why the pound to New Zealand dollars interbank exchange rate has neared this two-week high is because two executives of the Bank of England (BoE) have suggested recently that UK interest rates might rise in the foreseeable future.

If so, this would make investing in British assets more profitable. This lifts demand for British sterling and its value.

Last Saturday 8th June, the BoE's Chief Economist, Andy Haldane, published an article in The Sun newspaper, suggesting that the central bank might soon hike borrowing costs above 0.75%.

Mr. Haldane wrote that the time is coming "when a small rise in [UK interest] rates would be prudent to nip any inflationary risks in the bud".

Meanwhile, BoE policymaker Michael Saunders made similar remarks this Monday 10th June, at a speech to the Institute of Directors (IoD) at Southampton's Solent University.

Mr. Saunders told the assembled British CEOs that: "We probably would have to return to something like a neutral stance [in interest rates] earlier than markets project."

According to Mr. Saunders, a "neutral stance" would be about 2.0%. So this suggests there's lots of room for the UK's central bank to lift interest rates, before they risk raising borrowing costs too high.

Mr. Saunders' comments also suggest that the financial markets are currently being too pessimistic about the possibility that the BoE may lift interest rates.

Also, it's worth noting that Mr. Saunders told the IoD in Southhmpton that: "I want to stress that the MPC does not necessarily have to keep rates on hold until all Brexit uncertainties are resolved."

This tells us that the BoE might hike interest rates, even before we know the outcome of Brexit, or the UK has negotiated its exit from the EU, or our future trade deal with Europe.

These BoE policymakers' comments have strengthened the pound, because when the central bank hikes UK interest rates, this lifts the rate of return for investing in British assets.

This encourages the world's money managers to place their money in the UK, to earn more profit. To do this, they first must buy British sterling. This lifts demand for the pound, and its value.

Sterling to NZ Dollar Rate May Be Affected by Brexit Uncertainty

However, looking ahead, the pound to New Zealand dollars interbank exchange rate might be influenced by the UK's continuing Brexit uncertainty.

On the one hand, the Conservative Party's leadership candidates increasingly favour a 'hard' or 'No Deal' Brexit. On the other hand, Parliament is organising to prevent a 'No Deal' Brexit.

This week, Boris Johnson, the leading candidate to replace Theresa May as Prime Minister, will officially launch his candidacy campaign, reports The Guardian newspaper.

In his speech, Mr. Johnson is due to say that: "After three years and two missed deadlines, we must leave the EU on October 31. We simply will not get a result if we give the slightest hint that we want to go on kicking the can down the road."

This is to say, Mr. Johnson is prepared to take the UK out of the EU on October 31st, even without a deal. This possibility concerns the financial markets are British businesses, because we'd revert to trading with the EU on World Trade Organisation (WTO) terms.

This would mean more bureaucracy and paying higher tariffs. This could slow the UK's economic growth.

That said, while the Conservatives' leadership candidates are leaning towards a 'No Deal' Brexit, Parliament is organising to prevent this, according to The Financial Times newspaper.

To be specific, the opposition parties, including Labour, the Liberal Democrats, the Scottish National Party and the Greens, are tabling a motion to take control of Parliament's business on June 25th.

The opposition parties' objective is to pass legislation that makes a 'No Deal' Brexit illegal, without Parliament's approval. If so, this would oblige the next Prime Minister to pursue a form of Brexit with MPs' approval.

This is likely to be a 'softer' Brexit, in which the UK retains closer economic and political ties to the EU, such as fewer tariffs.

So to sum up, the UK's Brexit outcome remains up-in-the-air. While this remains the case, this might affect the pound to New Zealand dollar exchange rate, now and in the future. That said, today the GBP to NZD rate stands near a two-week high.

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Please bear in mind, this article is Pure FX’s opinion only and does not constitute advice. Moreover, the exchange rates referred to in this article are the interbank rates, which are the rates at which banks and financial institutions buy and sell currency to each other. Therefore these exchange rates cannot be accessed by individuals or SMEs, and are not the same rates that Pure FX can offer. To get a free exchange rate quote, call us on +44 (0) 1494 671800, or email peter.lavelle@purefx.co.uk.

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