Pound-New Zealand Dollar Rate Forecast Back at 2.0 Year-end by Leading Investment Bank

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• GBP/NZD spot rate at time of writing: 1.9729
• Bank transfer rate (indicative guide): 1.9030-1.9100
• FX specialist providers (indicative guide): 1.9118-1.9400
• More information on FX specialist rates, here
• Set an exchange rate alert, here

The New Zealand Dollar is forecast to weaken modestly in the short-term and trend lower over the year by foreign exchange analysts at Barclays, who say the currency faces headwinds from the RBNZ and uncertainty about New Zealand's economic recovery.

The UK-based global investment bank meanwhile expects the British Pound to remain supported, ensuring the Pound-to-New Zealand Dollar exchange rate (GBP/NZD) maintains a gentle upward bias over coming months.

"NZD appreciation on better growth and risk sentiment has likely run its course, in our view," says Ashish Agrawal, an analyst with Barclays.

He adds that NZ Dollar risk premia could climb as New Zealand’s recovery remains uncertain, given lack of support from tourism and reduced fiscal support.

Uncertainty over New Zealand's economic recovery was laid bare on March 17 when Statz NZ reported the country's economy declined by 1.0 percent in the final quarter of 2020, an outcome that surprised analysts and the market and highlighted headwinds facing the economy despite the absence of domestic lockdown measures.

"We also expect markets to scale back and push out normalisation expectations as RBNZ leans against market pricing and effective macroprudential measures support retaining a dovish bias," says Agrawal.

The New Zealand Dollar dropped against all its peers on March 23 after the government announced a series of measures to cool the housing market, meaning the pressure on the Reserve Bank of New Zealand (RBNZ) to raise rates has diminished.

The government announced plans including the phasing out tax relief on interest payments and extending the bright-line test which effectively brings more existing homes into scope for capital gains tax.

The market is betting that the new aggressive moves by the government to cool the sector gives the RBNZ a pass at raising rates, effectively meaning it can sit on a lower-for-longer rates policy, which in turn takes some support away from the NZ Dollar.

The GBP/NZD exchange rate rose 1.40% in the wake of the decision and is now 2.0% higher on the week at 1.9732. The NZD/USD exchange rate fell 2.10% following the decision and is down 2.50% on the week at 0.6979.

Following the government's decision expectations for a RBNZ rate hike dropped significantly according to money market pricing, as investors moved to price out the possibility of a shift to a more hawkish stance in the next year with the aim of curbing the housing bubble.

All the while the RBNZ continues to pursue a programme of quantitative easing which sees it expand its balance sheet by buying New Zealand government bonds, which in turn surpasses the yield paid on those bonds and keeps a lid on the cost of finance throughout the economy.

"The RBNZ continues to expand its balance sheet and the NZD is at risk from unwinding by foreign investors who hold NZD40BN of bonds," says Agrawal.

Trade dynamics are meanwhile cited by Barclays as likely to be relatively unsupportive.

"The current account deficit is also expected to widen, given stronger imports and no tourism revenue," says Agrawal. The RBNZ expects a deficit of 2.8% of GDP in 2021-22 versus 1.3% of GDP in 2020-21.

Barclays analysis shows that the current valuation of the NZ Dollar to be also relatively unsupportive, and they say the RBNZ could express discomfort with NZD strength if the currency happens to rise further above the RBNZ’s revised path.

By contrast, Barclays tell clients the outlook for the British Pound has improved of late and they expect the UK currency to remain well supported on the back of a strong economic recovery which is expected over coming months as a sustained exit from lockdown is pursued.

"We expect sterling to remain strong," says Marek Raczko, an analyst with Barclays. "A robust economic recovery, spurred by the rapid vaccination effort and fueled by generous fiscal stimulus should support GBP."

Barclays also think the Bank of England will remain on hold throughout 2021, maintaining its accommodative stance, but at the same time is not likely to be concerned by a strengthening Pound Sterling, says Raczko, as it will likely reflect solid economic growth.

Barclays forecast GBP/USD to rise to 1.40 by the end of June 2021, a target that is maintained through to year-end.

The NZD/USD exchange rate is forecast at 0.71 by the end of June, with the year-end target set at 0.70.

On a cross currency exchange rate basis, this gives a GBP/NZD exchange rate forecast of 1.9718 and 2.00 respectively.