Update: The Pound has managed to hold onto its gains versus the New Zealand Dollar today, despite worse-than-expected GDP figures for the first quarter of 2017. Growth had been expected to slow from 0.7% to 0.4%, but instead clocked in at 0.3%. On the year, GDP was expected to advance from 1.9% to 2.2%, but fell short by ten basis points. GBP NZD is currently 0.6% higher at 1.88 and is trading at its best level since the 22nd of July 2016.
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US President Donald Trump recently attacked Canadian dairy farmers, prompting investors to sell out of the New Zealand Dollar on the fear New Zealand may become the President’s next target.
The GBP NZD exchange rate was able to climb to a nine-month high of 1.86, pushed up by concerns New Zealand, the world’s largest dairy exporter, could soon become the target of Trump’s protectionism.
Trump was responding to a new agreement on pricing from Canada’s dairy farmers, which involves slashing prices on milk ingredients needed for the production of cheese and yoghurt.
US farmers in Wisconsin – the largest diary-producing state – and New York claim this has cost them millions of Dollars on ‘ultra-filtered milk’ – a highly processed version that, as a new product, was not covered by Canada’s existing dairy trade tariffs and therefore could be competitively priced against domestic products.
This product had been created to exploit a loophole in Canada’s tariff rules, but the government has now sealed the gap, leaving many US producers out of pocket.
The latest price drop means that ‘ultra-filtered milk’ has now lost its competitive edge, harming US producers who had geared themselves heavily towards producing and exporting it to Canada.
As the largest exporter of milk in the world, Trump’s focus on dairy could bode ill for New Zealand.
Trump has often repeated his campaign rhetoric of ‘Buy American, Hire American’ since his election, while taking several actions that prove his dislike of free-trade agreements has not softened upon entering the White House.
The United States was New Zealand’s second-largest market in terms of dairy exports in 2015, importing over NZ$1.2 billion worth of dairy goods.
Canada, meanwhile, only exported around US$112.6 million (NZ$163.39 million) worth of dairy to the States; New Zealand therefore presents a bigger target for Trump’s protectionism, which could harm the country’s already unsteady dairy industry.
This fear is likely to help propel GBP NZD exchange rates higher as investors sell out of the New Zealand Dollar, although bouts of profit-taking on Sterling could give the ‘Kiwi’ some reprieves.
After rising to multi-month highs on news of a snap general election on June 8th, investors recently sold the Pound to profit on the strong appreciation; GBP NZD is currently 4.7% higher than before the election announcement on Tuesday 18th April.
Markets are confident the Conservative Party will win with a strong majority than in the 2015 general election, which would smooth out the Brexit process.
Not only would it reduce the influence of the opposition in Parliament, it would also likely give additional Tory Remainers or less-hard line Brexiters seats in the Commons, affording Theresa May more support for a ‘softer’ approach to Brexit.
Provided the Conservatives manage to keep their strong lead in the polls, which is currently over 20% versus Labour, investors are likely to keep the Pound strong thanks to confidence of political stability.
Should that polling lead begin to fade, traders will become more cautious and the Pound could weaken from its current levels.
Tomorrow’s data could also knock the Pound from its highs, as GDP figures for the first quarter of 2017 are expected to show that the economy slowed from 0.7% to 0.4% at the beginning of the year.
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