Pound-to-New Zealand Dollar Rate Retreats from Post-referendum High On RBNZ Shift into Neutral

- GBP/NZD retreats from post-referendum high on RBNZ decision. 

- GBP in 2nd decline after its 3rd failure to overcome 2.0440 level.

- As NZD strengthens across board after RBNZ shifts into neutral.

- Market prices-out 2020 rate cut with RBNZ rates on hold for now.

- Orr says RBNZ has time to consider options, monitor coronavirus.

Above: RBNZ Governor Adrian Orr. File Image © Pound Sterling, Still Courtesy of Financial Services Council NZ

- GBP/NZD Spot Rate: 2.0047, down -0.88% today

- Indicative bank rates for transfers: 1.9361-1.9501

- Indicative broker rates for transfers: 1.9762-1.9882 >> find out more about this rate.

The Pound was pushed further back from post-referendum highs Wednesday as the New Zealand Dollar strengthened broadly after the Reserve Bank of New Zealand (RBNZ) shifted into a ‘neutral’ interest rate policy stance. 

The Pound-to-New Zealand Dollar rate was on course for a second consecutive decline Wednesday which has taken it further back from the 2.04440 post-referendum  high, which it failed to overcome for a third time last Friday. 

This is after the RBNZ left the cash rate unchanged at 1% and signalled that it no longer expects to have to cut rates again in the near future, when it had suggested in November that at least one more cut was likely this year. 

"The RBNZ shifted away from a dovish policy stance, taken up by many central banks globally in light of slowing growth and geopolitical risks. Moreover, the RBNZ predicts that domestic growth will pick up in the second half of this year, despite the expected small hit from the coronavirus," says George Vessey, a currency strategist at Western Union. "GBP/NZD is down nearly 1% already this morning, losing over two cents and flirting with the NZ$2.00 threshold."

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

Governor Adriann Orr now says “monetary policy has time to adjust if needed,” indicating the bank wants time to observe the impact of its three 2019 cuts as well as the development of coronavirus in China. 

The RBNZ has cut rates three times in the hope of lifting economic growth and meeting the long-elusive midpoint of the 1%-to-3% inflation target, but it hinted strongly on Wednesday that it considers this mission to be complete. 

“The market had not expected a move today, but the RBNZ did strike a more sanguine tone than expected, seeing the NZD and short-term yields spike,” says Sharon Zollner, chief economist at ANZ. “A very long six weeks away, we will all have a much better idea of both the near-term immediate impact, and the potential timeline and geographic spread of the epidemic. If it’s warranted, the RBNZ will cut the OCR. The OCR path they forecast today should not be seen as any kind of commitment in such a rapidly moving situation.”

Above: Changes in New Zealand's various measures of inflation as recorded by the RBNZ. 

New Zealand’s central bank also indicated that a rate hike is now a possibility for the years ahead, which is a boon for the Kiwi given that just a few months ago markets were preparing themselves for multiple additional cuts this year. 

“The stronger kiwi has been triggered by the announcement overnight from the RBNZ that they have dropped their easing bias. The RBNZ’s updated forecasts for the key policy rate show that it is now expected to bottom at 1.00% rather than 0.9%, and by June 2021 the key policy rate is expected to be 20 basis points higher than projected back in November. The first rate hike is expected by around Q3 2021,” says Lee Hardman, a currency analyst at MUFG. 

Above: RBNZ cash rate history and assumptions for future levels. 

Pricing in the overnight-index-swap market had implied a year-end cash rate of 0.83% ahead of the RBNZ’s Wednesday decision but that implied rate has risen to 0.90% since the statement was made, indicating a lesser probability of a rate cut ahead and lifting the New Zealand Dollar sharply in the process. 

The dire outlook for interest rates has weighed heavily on the Kiwi Dollar in the last year which explains why it was the best performing major currency on Wednesday. It rose against all major rivals in the morning session.

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

Kiwi gains have confirmed a third successive failure by the Pound to overcome a post-referendum high that can be seen from the weekly charts, which might be a bearish technical development for the Pound-to-Kiwi rate.

“It’s actually the exchange rate, rather than interest rates, that is the most important adjustment mechanism for this kind of global shock that hits exporters hardest. There’s no reason to think the NZD won’t do its job, and move broadly together with our commodity prices, wherever they may head,” Zollner warns.  

Above: NZD/USD rate shown at daily intervals. 

Both ANZ’s Zollner and MUFG’s Hardman have warned the RBNZ might be too optimistic in its outlook for the Kiwi and global economies in light of the damage that looks to have been done in China by the coronavirus that’s spreading there. The growth rate for infections and deaths is now falling but the Chinese economy remains largely at a standstill and the outbreak is far from over.  

New Zealand's largest trading partner is China so the Kiwi currency can easily be influenced by the trajectory of the Yuan, which has been remarkably stable since the outbreak began to gather pace in January. But the trajectory of commodity prices is also important too, and those are more sensitive to Chinese economic growth than they are movements in Yuan exchange rates. 

“The RBNZ may have displayed an even more hawkish policy update if it was not for the downside risks which have emerged recently from the coronavirus. The RBNZ cautiously acknowledged that the virus is likely to temporarily hit growth during the first half of this year. The RBNZ have assumed a 0.3% hit to growth, but are wary of the risk that the impact could prove larger and more persistent which could yet require the RBNZ to reverse course and lower rates further,” Hardman says.