The inverted bond yield curve
An indicator that is representative of the current economic slowdown is the inversion of the US bond yield curve.
A yield curve graphs the difference between interest rates on long-term and short-term investments. A normal curve shows long-term investments paying high rates of interest. An inverted curve means the opposite, with short-term bonds paying higher interest than long-term ones. The curve itself is considered a reasonably accurate measure of economic sentiment in the market. It is a leading economic indicator, with the previous success of predicting the economic future.
The yield curve hasn’t inverted since 2007. Six months later, the US fell into an 18-month recession, dragging the wider global economy down with it.
Following the US inversion, both the Australian and New Zealand bond yield curves have inverted. So, should we all start running to the hills as the next recession is near? The answer is no, though it might have an effect on interest rates.
Interest rate cuts can put downward pressure on the value of the Kiwi dollar, as it could increase the rate differential in comparison to other countries such as the US. This encourages investors to move their money away from Kiwi investments seeking a greater return. Less demand for our investments = downward pressure on the NZD.
It is Brexit Day!
Just kidding, the UK still has no idea what they are doing when it comes to
Brexit. Luckily for them, they have been granted a few extra days to try and get themselves sorted. If British MPs can agree on a deal today, they’ll wipe the sweat off their brows proclaiming ‘phEU’, as they will have an extension until the 22nd of May. However, if they can’t agree on a Brexit withdrawal agreement (which is pretty likely based on past behaviour), they will only have until the 12th of April before the UK leaves the EU.
On Wednesday, British MP’s held some indicative votes to try and figure out what the majority wants. Eight votes were held, and none of which claimed a majority.
Considering none of the indicative votes were successful, British Prime Minister, Theresa May, will be putting forward another vote today in the hopes that they can secure the May 22 extension. This vote will be slightly different to the others though, as they would only be voting on half of the deal.
The current withdrawal agreement is made of two parts:
Part one - The Withdrawal agreement. This is a legally binding document setting out the terms of the UK’s departure from the EU. It includes a settlement, information on what the transition period would look like, protection of citizen rights and the controversial Irish backstop.
Part two - The Political Declaration. This outlines the future relationship between the UK and the EU after Brexit and is not legally binding.
Theresa May plans only to put part one forward to vote which is causing quite the stir amongst MP’s. In addition to this, Prime Minister May has also stated that she will resign if her Brexit deal is agreed upon by MPs. This will allow someone else to lead the remaining negotiations with the EU.
Should they agree on part one, it will technically grant them the extension until May 22; however, it would not ratify the deal as they need part two of the agreement for that to occur. The Government would then need to pass part two of the agreement, or change the law so that part two isn’t necessary to ratify the deal.
If MPs don’t agree on part one, then the UK will only have until April 12 before they leave the EU. This will most likely lead to more ‘indicative votes’ on Monday, and the prospect of a ‘no deal’ will become more of a reality.
The next few weeks will be turbulent and are likely to have an influence on the value of the pound against the Kiwi dollar. If you’re heading to the UK soon, we recommend researching
how Brexit will affect your travels. It’s also worth adding
Rate Guard to your transaction in store. It’s free, and if the rate improves within 14 days of purchase, we will refund you the difference*.
Definitions for those of us playing at home:
Dovish vs Hawkish
These are terms that refer to the general sentiment of a country’s central bank when talking about monetary policy.
The bank will take a hawkish stance when they want to prevent excessive inflation. This is often done by increasing interest rates. Increasing interest rates generally puts upward pressure on the value of that country’s currency, as investors can now get a greater return.
The bank will take a dovish stance when the economy is not growing and the government is seeking to guard against deflation. You guessed it; this could lead to decreasing interest rates which would put downward pressure on the value of the currency. Just keep in mind that this value is still relative to other countries, so a dovish stance is not always bad news for the value of the currency.
An easy way to remember: hawks fly higher than doves. So when markets talk about things being hawkish, it generally means things are going up. You normally see doves on the ground, so if there is talk of things being ‘dovish’, things may be going down.
This blog is provided for information only and does not take into consideration your objectives, financial situation or needs. You should consider whether the information and suggestions contained in any blog entry are appropriate for you, having regard to your own objectives, financial situation and needs. While we take reasonable care in providing the blog, we give no warranties or representations that it is complete or accurate, or is appropriate for you. We are not liable for any loss caused, whether due to negligence or otherwise, arising from use of, or reliance on, the information and/or suggestions contained in this blog.
All rates are quoted from the Travel Money NZ website, and are valid as of 29 March 2019.
