The Pound-to-New-Zealand-Dollar Rate Rally is Over, Analysts Say

Image © Adobe Stock

- GBP/NZD a sell at TD Securities following recent rally.

- GBP celebrates Supreme Court ruling but slips Vs NZD. 

- NZD firms ahead of RBNZ decision, tipped to rise further.

- TD says NZD is due a correction, GBP vulnerable to losses.

- Barclays sees GBP/NZD rate sharply lower before year-end.

The Pound ceded ground to a firming New Zealand Dollar Tuesday and is being tipped by TD Securities to continue retreating from the Kiwi currency over the coming days and weeks, while analysts at Barclays are forecasting the exchange rate will fall sharply all the way into year-end and beyond. 

Pound Sterling rose against most rivals Tuesday as investors celebrated a landmark but controversial ruling that saw the Supreme Court declare the government's suspension of parliament unlawful, which has led parliament to be recalled. Oppposition MPs now have more time with which they, aided and abetted by an apparently partisan Speaker of the House of Commons, can seek to call the shots in the Brexit process. 

MPs already successfully hijacked the parliamentary agenda this month and imposed upon the government legislation that requires Prime Minister Boris Johnson to request a third Brexit delay no later than October 19 if an exit agreement has not been reached with the EU up until that point. And markets appeared to be speculating on Tuesday that those MPs might soon try something else that further lessens the risk of a 'no deal' Brexit at some time in the months ahead. 

The Pound-to-New-Zealand-Dollar rate, which had already risen more than 3% this month in response to the events playing out in Westminster, did not share in the Tuesday upturn and is now said by TD Securities to be vulnerable to a further downward correction. This is in part because the Kiwi was firming throughout the Tuesday session, ahead of the latest Reserve Bank of New Zealand (RBNZ) interest rate decision. It has fallen sharply this September.

"The momentum trade is clearly to hold this pair for another week. However, one notable concern with GBP is that the gap from [short-term fair value] acts as a decent proxy for Brexit risks. In other words, the injection of Brexit uncertainty into GBPUSD has seen the emergence of a discrepancy between [fair value] and spot," McCormick says. "The bulk of this rally reveals the ebbing of the prior discount. That was 4% to start the month, suggesting GBP could have a high bar to make further gains."

Above: Pound-to-New-Zealand-Dollar rate shown at 4-hour intervals. 

McCormick says recent gains by the Pound have come at the expense of investor compensation for the risks posed by the Brexit process, with what was once a 4% 'risk premium' having been whittled away in the last month or so despite that the threat of a 'no deal' Brexit has not been decisively removed. He says this risk premium could eventually return, resulting in losses for the Pound, but he also says that the Kiwi Dollar is itself likely to be a source of downward pressure on the exchange rate up ahead.

The RBNZ is expected to leave its cash rate unchanged at 1% Wednesday, after having cut it by 75 basis points already this year, and some in the market see this providing the Kwii with a moment's respite from the selling pressures that have driven it lower against most rivals in the last month.

"NZD looks the most glaring. It's the weakest performing currency in the G10, dropping a touch under 2% over the past month. At the same time, it holds a chunky risk premium, making it the cheapest currency in the G10. Ahead of the RBNZ, that presents an opportunity where NZD should rally even on a neutral outcome given how much bad news is baked into the cake," says Mark McCormick, head of FX strategy at TD Securities. "On the flipside sits GBP. It has enjoyed a nice rally over the past month...the fade trade is to sell GBPNZD."

Above: Pound-to-New-Zealand-Dollar rate shown at daily intervals.

TD Securities is looking for the Pound-to-Kiwi rate to fall over the coming days and weeks but Barclays is forecasting losses all the way into year-end. Barclays says a 'no deal' Brexit is now its 'base case' and that, if one does in fact happen, it's likely to take place only in the first quarter of 2020. In other words, the London-based bank is looking for an October extension of the Article 50 negotiating period to usher in a third Brexit delay. 

"Brexit’s path has become immensely more complicated. While the Johnson Government’s intent to exit the EU at all costs on 31 October appears to have been thwarted by Parliament, there still are many paths to a no-deal Brexit and it remains, narrowly, our base case outcome. Amid this high uncertainty, for the purpose of forecasting, we assume that a no-deal Brexit, if it occurs, takes place in the first quarter of 2020," says Nikolaos Sgouropoulos, an analyst at Barclays.

Most analysts say a general election is all but inevitable. That could see the Conservative Party campaign for an explicit 'no deal' Brexit mandate, which would almost certainly be taken badly by Sterling. However, there's significant uncertainty over when a ballot will actually be held and what the UK's EU status will be by that time. Sgouropoulos says the Pound-to-Kiwi rate will fall from 1.97 Tuesday to 1.90 by year-end, and to 1.78 by the end of March 2020.

Above: Pound-to-New-Zealand-Dollar rate shown at weekly intervals. 

Prime Minister Johnson has twice now requested the support of MPs from the opposition, other parties and his own party for a general election to be held in which the public can then decide the path ahead on Brexit but MPs have rejected the idea. They claim the government doesn't have a mandate for its Brexit policy, which is to leave the EU at the end of October irrespective of whether talks aimed at securing a negotiated exit have been succesful. 

"Because we anticipate significant dislocations on both sides of the English Channel, we see the UK falling into a shallow recession despite expected fiscal expansion and easier monetary policy. We expect a sharp depreciation in GBP to accompany the initial stages of a no-deal Brexit," Sgouropoulos says. "Once the initial uncertainty created by short-term dislocations clears, we believe the nearly 50-year low in the real effective value of GBP should attract significant long-term buyers and investment to an economy that still has many attractive attributes. In our forecasts, this leads to a partial rebound in GBP."

Opposition MPs are demanding a third delay before going back to the ballot box. But the government claims it does have a mandate for its approach and that if the opposition wants to scupper it then there should be an election. It has long said its policy is to leave the EU with a deal but that "no deal is better than a bad deal" and has consistently said that outcome must be planned for.

The familiar refrain of "no deal is better than a bad deal" was also repeated in the Conservative Party manifesto of 2017. Parliament itself voted to make a 'no deal' Brexit the default outcome in law in the event it hadn't approved a withdrawal agreement by the scheduled departure date. It rejected former Prime Minister Theresa May's agreement three times before the original Brexit date of March 29 2019, leading May to request two extensions of the Article 50 negotiating period. 

Time to move your money? Get 3-5% more currency than your bank would offer by using the services of foreign exchange specialists at RationalFX. A specialist broker can deliver you an exchange rate closer to the real market rate, thereby saving you substantial quantities of currency. Find out more here.

* Advertisement