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'We’re in for a rough period': Warning for New Zealand as kiwi drops on Brexit uncertainty

Yahoo and Agencies
Updated

New Zealanders have been warned to prepare for a bumpy ride ahead as the European Union calls for a swift divorce from Britain.

The New Zealand dollar dropped to a 10-day low against the greenback this morning, falling to 70.80 US cents at 8am in Wellington from 71.30 cents on Friday in New York.

The kiwi fell to 70.80 cents at 8am in Wellington.
The kiwi fell to 70.80 cents at 8am in Wellington.

The trade-weighted index gained to 75.91 from 75.36 last week as investors fled the British pound and euro after the UK referendum.

Cameron announces his resignation outside 10 Downing Street, London as his wife Samantha looks on. Source: PA Wire
Cameron announces his resignation outside 10 Downing Street, London as his wife Samantha looks on. Source: PA Wire

The Brexit outcome caught investors off-guard, stoking uncertainty in financial markets and raising the prospect that local interest rates will have to go lower.

John Key had urged the UK to remain.
John Key had urged the UK to remain.


Following the vote, Prime Minster John Key said there was unlikely to be any immediate impacts on New Zealand.

"We will continue to have a strong relationship with both the EU and the UK, and to further develop our ties with both. In this respect nothing has changed," Mr Key said in a statement.

READ MORE: John Key: We respect Britain's decision to leave the European Union

But leading Kiwi economist Dr Ganesh Nana has warned the country is vulnerable and is not well prepared for the bumpy road ahead.

“So buckle in for the coming months, they will be neither smooth, nor enjoyable. We’re in for a rough period," Berl's chief economist said in a statement.

"Heading into the Brexit vote were underlying weakness in Europe alongside geo-political upheaval and a peculiarly potentially disruptive US presidential election campaign. Meanwhile, prospects for the Chinese economy remain the elephant in the room (the response of international financial flows to the prospect of sub seven percent annual growth in China remains a worrisome unknown)."

Dr Nana said New Zealand will not be able to escape the short and longer term fallout from such global disruption.

"In the run-up to the Brexit vote the New Zealand dollar rose to close to or above 12 month highs against the US dollar at about 71 US cents, the Australian dollar at 95 Aussie cents, the UK pound at 49 UK pence, and the Euro at €0.63. The immediate response to the Brexit decision saw a reversal of some of these gains, as funds fled to the conventional safe havens of gold and the greenback.

“But the vote also sees the fog thicken over the future of the EU not to mention the leadership of the governing Conservative Party in the UK. With such a climate, reinforced by recent OECD and IMF downwards revisions to global growth forecasts and relatively attractive New Zealand interest rates, the attractiveness of the NZ dollar could well return after the immediate response. That could further restrain external sector income and, so, investment in that sector."

The kiwi jumped against the pound to 52.26 pence straight after the Brexit vote, which was the highest level since October 2013.
The kiwi jumped against the pound to 52.26 pence straight after the Brexit vote, which was the highest level since October 2013.

BNZ's Jason Wong said it's too early to judge whether the worst is over, adding "indeed it probably isn't".

"The political turmoil in the UK that has developed over the weekend and the months of uncertainty ahead suggest that a period of subdued risk appetite is likely to develop over coming weeks, which suggests more downside potential for risk assets and the NZD."

New Zealand swap rates tumbled on the vote as investors predict the Federal Reserve will delay its tightening cycle, meaning the Reserve Bank will be more likely to cut the official cash rate in August.

ANZ Bank New Zealand senior economist Philip Borkin said the 'Brexit' vote will also hit commodity prices and credit markets.

"There would obviously be growth implications from weaker commodity prices, tighter credit markets, and a strong NZD," Mr Borkin said. "Whatever the case, the odds of an August OCR cut have increased."

READ MORE: Can the EU survive Brexit?

The local currency climbed to 52.44 British pence at 8am in Wellington from 52.11 pence on Friday in New York and gained to 64.30 euro cents from 64.12 cents.

It slipped to 95.29 Australian cents from 95.47 cents last week, dropped to 71.99 yen from 72.86 yen and fell to 4.6841 Chinese yuan from 4.7165 yuan last week.

The S&P NZX 50 was down 1.1 per cent to 6596.80 in early trading, and investors were bracing themselves for more fall-out as trading resumes today.

READ MORE: British politics in turmoil as Brexit talks loom

- With NZN