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NZD traded a 25 point range against the USD and ended at 0.7210; GBP weaker on surprise election result, NZD up 1.6% against the GBP; currencies, other than GBP, close within 0.2% versus the USD

Currencies
NZD traded a 25 point range against the USD and ended at 0.7210; GBP weaker on surprise election result, NZD up 1.6% against the GBP; currencies, other than GBP, close within 0.2% versus the USD

By Jason Wong

In currency markets, the only price action of note on Friday was the plunge in GBP as soon as exit polls showed a likely inconclusive and therefore shocking election result.  There was some intra-day volatility during the official count, but much of the initial market reaction was sustained and GBP closed the NY session around 1.2745, down 1.6% and at a similar level to the NZ close.  NZD/GBP reached a high of just over 0.57, before ending at 0.5660, up 1.6%. PM May’s gamble of trying to increase her Conservative party majority completely backfired.  She remains the PM (for now) but requires the support of the 10-seat Democratic Unionist Party of Northern Ireland to form a working government. The details of any support agreement will be worked on this week.

There was little spillover of the shock election result to other currencies or asset markets, with the market viewing the outcome as an isolated UK problem with little contagion risk for the rest of the world.  The election result likely weakens May’s position ahead of Brexit negotiations with the EU, but the fall in GBP was moderated to the extent that some see this as a good thing, making a “softer” Brexit possibly more likely than the “hard” Brexit path that PM May was looking to pursue before the election.

Apart from GBP all other major currencies closed the day within plus or minus 0.2% versus the USD with little other news to drive markets.  EUR closed just below 1.12.   Following Thursday’s ECB policy announcement and the nudge down in inflation forecasts, Governing Council member Nowotny said that there is “risk that inflation rates come in even lower if I assume a further increase of the euro exchange rate, which would be inflation dampening”.  While that comment came across as dovish, he also noted that he assumes the ECB will discuss tapering of asset purchases in July and September.

Despite the shock UK election result, the NZD traded in a tight 25 pip range on Friday, ending flat around 0.7210.  We suspect that the NZD is running into some headwinds following the strong recovery over the past couple of weeks.  Q1 GDP data this week is expected to be on the soft side, while the FOMC is expected to hike rates and potentially not deviate much from its recent policy tone and rate projections.  This combo would be NZD-negative at the margin.


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