British Pound to New Zealand Dollar Surges on NZ Coalition Announcement

The Pound to New Zealand Dollar exchange rate surged on Thursday, despite persistent economic and political concerns in Britain, as investors digested the latest NZ political surprise.

GBP/NZD began the week trading at around 1.8514. After slipping earlier in the week, the pair shot up over two cents on Thursday and trended near its best levels since May, 1.8797.

New Zealand’s 2017 general election was held on the 23rd of September – almost a month ago. The election ended with the incumbent National Party winning the most seats as expected, but not enough of the vote to form a majority government.

As a result, between then and the 19th of October the key players in the election have been holding negotiations with NZ First, the nationalist party seen as ‘kingmaker’ in coalition talks.

In the end, the NZ First Party chose to form a coalition with the Labour Party, which won the second highest number of seats.

This meant that Jacinda Ardern would become New Zealand’s Prime Minister, mere months after becoming the Labour Party head back in August.

As this is the first time in nine years that the Labour Party will be NZ’s ruling party, and the coalition between Labour, NZ First and the Green Party is still full of uncertainties, the New Zealand Dollar plummeted.

The Labour-led government could lead to notable changes in how New Zealand’s economy is run. Potential clashes within the coalition down the line are also possible.

Sterling strongly benefitted from the news, despite a lack of reasons for investors to buy the Pound itself.

Markets are becoming increasingly anxious about the Brexit process, amid speculation that UK-EU negotiations could ‘break down’ and the UK government could walk away with ‘no deal’ on Brexit.

On top of this, UK economic concerns worsened on Thursday when September’s UK retail sales results fell well short of expectations.

UK retail sales were forecast to slip to -0.1% month-on-month and to 2.1% year-on-year, but the figures came in with much worse -0.8% and 1.2% results respectively.

Analysts noted that the UK pay squeeze was likely having a negative impact on UK consumer activity, which could also drag on Britain’s growth prospects.

This led to a drop in Bank of England (BoE) interest rate hike bets, as investors are concerned that Britain’s economy may not be resilient enough to support tighter interest rates any time soon.

Still, GBP/NZD could hold most of this week’s gains as investors continue to digest the surprising outcome of New Zealand’s 2017 general election.

While the ‘Kiwi’ could firm as more details on the Labour government’s economic plans come in, it could also worsen if analysts become concerned about upcoming economic changes.

Friday’s UK public sector net borrowing results are unlikely to have a notable impact on GBP/NZD exchange rate movement.

Instead, political developments are likely to drive the Pound to New Zealand Dollar exchange rate as traders await next week’s key UK growth projections.