Pound-New Zealand Dollar Rate Forecast: Stuck below 2.02

- GBP/NZD predicted to remain capped by 2.02
- Coronavirus sentiment aids NZD higher
- RBNZ is week's key domestic risk event

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- Spot GBP/NZD rate at time of publication: 2.0134 -0.05%
- Bank transfer rates (indicative): 1.9429-1.9570
- Specialist transfer rartes (indicative): 1.9850-1.9953 >> Find out more

The British Pound is likely to see its upside potential capped against the New Zealand Dollar over coming days amidst the market's evolving belief that upcoming EU-UK trade negotiations will be tense and that the coronavirus outbreak is fading in severity.

The GBP/NZD exchange rate surged through the 2.02 resistance barrier on January 31, but the move has since been confirmed as a 'false break' that was ultimately swiftly reversed. That the surge came at month-end suggests technical positioning might have been behind the surge and this confirms that there is no fundamental basis for GBP/NZD to be above 2.02 at this juncture.

We are therefore left eyeing 2.02 as a resistance point at which Sterling will struggle to build bids and move sustainably above. Some solid positive news would be required for such an outcome, but with market nerves building over EU-UK trade negotiations we doubt such assistance will be found.

As we note in our latest GBP piece, the EU and UK are headed for tough negotiations that could fail relatively early on, and the assessment is that Sterling will struggle to find upside momentum in such an environment.

The coronavirus meanwhile remains a concern for the New Zealand Dollar which is expected to react to the waxing and waning of sentiment surrounding the outbreak. Weekend data confirms that the rate of infections is still levelling off and the market last week made a judgement that a potential turning point had been reached.

New Zealand has significant trade exposures to China and Australia (which is the most exposed developed economy to China), therefore sentiment surrounding the coronavirus is understandably having an impact on the NZD.

"The coronavirus remains inevitably the key driver for NZD... considering that the currency has lost almost 2% since the start of the epidemic. This is no surprise when thinking that New Zealand has strong ties to the Chinese economy and the NZD has a high-beta to market risk," says Chris Turner, Global Head of Strategy at ING Bank in London.

Looking at the latest coronavirus statistics on Monday, Johns Hopkins CSSE reports that the total confirmed cases stand at 40561, with 910 deaths recorded and 3436 recoveries.

Image courtesy of Johns Hopkins CSSE

The above graphic shows the rate of increase in confirmed cases is starting to flatten out, in line with last week's expectations for such an outcome to transpire. It is in this environment that the New Zealand Dollar is recovering and we would expect further GBP/NZD underperformance as a result of this dynamic extending.

Further aiding sentiment is news that major firms are to start production again following an extended Chinese new year holiday period aimed at restricting the movement of people. "Risk markets have developed a mild recovery on the back of continued Chinese stimulus to the economy to combat the effects of the coronavirus, along with reports that a number of major manufacturers, including Sony and Apple, have been given the green light by Chinese authorities to resume production," says Robin Wilkin, Cross-Asset Strategist with Lloyds Bank.

"Many Chinese firms have instructed their employees to return to work today, sparking a rise in Chinese stocks, the Yuan, and the Australian Dollar," says Joshua Mahony, Senior Market Analyst at IG. "This relief may be a little premature given the lack of any progress in reversing the course of the coronavirus. With the death count in in the Hubei province alone topping 900, there is a fear that many remain unaccounted for in both China and further afield. While a rise in business activity certainly lessens the potential economic impact of this crisis, it will also likely heighten the rate of infection going forward."

Watch the RBNZ

The New Zealand Dollar does however have some domestic interest this week as it is the turn of the Reserve Bank of New Zealand (RBNZ) to give their latest verdict on interest rates and the outlook for the New Zealand economy.

"The RBNZ meeting will attract quite a lot of attention. The Bank has not touched its policy rate since August 2019 and we are inclined to think they will stick to their neutrality through 2020," says Turner.

The rule of thumb is that an interest rate cut at a central bank triggers weakness in the currency it issues, therefore expectations for no further interest rate cuts in the foreseeable future are on balance supportive of the New Zealand Dollar.

According to ING, money markets are pricing in a 35% chance of a cut by Q2.

With no changes to interest rates expected all focus will turn to the RBNZ's guidance as to where they see the economy and interest rate going.

If the RBNZ follows in the footsteps of last week's Reserve Bank of Australia assessment and declares the outlook for the economy is improving, expect the NZD to move higher.

However, if the RBNZ strikes a more realistic tone and warns on the potential for negative economic impacts in the wake of the coronavirus outbreak, expect some NZD weakness that could allow the GBP/NZD exchange rate to prod the 2.02 level.

"There are virtually no bets in the markets for a cut and our impression is that most investors are expecting very little in terms of change in language. Almost surely, the Bank will mention the downside risks stemming from the coronavirus outbreak, but we expect it to retain a wait-and-see approach to better assess the potential impacts on the NZ economy, similarly to what the RBA did only a few days ago," says Turner.

In terms of currency market impact, Turner says the meeting may go down as a non-event, with relatively marginal implications for the NZD.

Indeed, Turner expects the NZD to be solely driven by coronavirus news this week and on this front developments are supportive, for now at least.