New Zealand Dollar: GBP/NZD is Forecast Lower by ABN AMRO

- GBP/NZD well supported multi-month
- But off 2021 highs
- RBNZ could hike rates twice in 2019

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• GBP/NZD reference rates at publication:
• Spot: 1.9832
• Bank transfers (indicative guide): 1.9138-1.9277
• Money transfer specialist rates (indicative): 1.9654-1.9693
• More information on securing specialist rates, here
• Set up an exchange rate alert, here

We are deep into the third quarter of 2021, yet the Reserve Bank of New Zealand is being tipped to deliver up to two interest rate hikes before the year is done.

This aggressive attempt to normalise interest rate policy having cut it to record lows at 0.25% during the 2020 Covid crisis is said by foreign exchange analysts to be a source of fundamental support for the New Zealand Dollar.

"Investors now expect the rate hike cycle to start this month, on 18 August. This is much earlier than expected some weeks ago. Short term interest rate markets even price in close to three 25bp rate hikes by the end of this year," says Georgette Boele, Senior FX Strategist at ABN AMRO.

Foreign exchange markets are presently focussed on central bank interest rate normalisation, favouring the currencies belonging to those central banks which will lead the pack.

"We expect the NZD to remain well supported in the run-up to the next RBNZ MPC review," says a regular weekly currency briefing from Barclays.

The Reserve Bank of New Zealand (RBNZ) could now well be the most aggressive of the G10 group of central banks as it is tipped by investors to raise before, and faster than, the Norges Bank.

"These developments have supported the New Zealand dollar across the board. We expect more upside in the currency in the months ahead," says Boele.

Consistent with this, the Pound has lost value to the New Zealand Dollar since a 2021 high was recorded above 2.0 on July 28, with the Pound-to-New Zealand Dollar exchange rate (GBP/NZD) slipping back to 1.9839.

Above: Four-hour chart of GBP/NZD

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Money market pricing shows investors are now fully priced for a 25bp hike at the August 18 meeting; indeed the market is trading at 53bp (+12bp last week), "implying some likelihood of a larger move," say analysts at Barclays.

The one-year ahead RBNZ OIS market is pricing 95bp tightening (+17bp last week).

"The trigger came from the strong Q2 employment data, with the unemployment rate close to full employment," says Barclays.

Barclays' economists brought forward the timing of rate hikes and expect the RBNZ to hike twice this year, starting in August.

"We see negligible risks to the NZD from some disappointment, with little to suggest a lower terminal rate and given the relatively muted response to rate normalisation expectations thus far," says Barclays.

Despite an aggressive repricing of the RBNZ monetary policy outlook the market has also been forced into accepting interest rate rises at the Bank of England won't be too far behind.

The Bank on August 05 raised its inflation forecasts sharply while rubber-stamping the market's expectation for a first interest rate to take place in 2022.

The developments place the Bank in the pack of those central banks looking to normalise policy, which is providing some support to the Pound and limiting damage against the New Zealand Dollar.

This is reflected in the trend for GBP/NZD through 2021 which has been higher, as shown in the below chart, suggesting this particular exchange rate is not losing significant value in the face of aggressive expectations for RBNZ rate hikes.

Above: Daily GBP/NZD chart showing 2021 trend

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If anything the promise of two RBNZ rate rises before year end is merely limiting the Pound's advance and preventing a more sustained move back above 2.0 in GBP/NZD.

Nevertheless, ABN AMRO's point forecasts suggest that a more decisive turn lower in GBP/NZD is likely as their forecasts suggest the pair will recent back to levels last seen in March by year-end.

ABN AMRO forecast the New Zealand-U.S. Dollar exchange rate at 0.73 by year-end, 0.73 by the end of the first quarter 2022, 0.74 by the mid-year point and 0.75 by the end of 2022.

Their Pound-Dollar forecast rests at 1.40 through this entire period, giving a cross exchange rate forecast for the Pound-to-New Zealand Dollar rates at 1.91 for end-year 2021 and the end of the first quarter 2022, 1.89 for the mid-year point and 1.86 for the end of 2022.