Pound-New Zealand Dollar Pushed Back to April Lows as NZ Exits Covid-19 Lockdowns

- NZD in strong start to new week
- Lifting of covid-19 lockdown restrictions aids gains
- But international headwinds to blow against NZD for some time yet

Above: New Zealand PM Jacinda Ardern announced easing of lockdown measures. Image (C) Pound Sterling Live, still courtesy of Te Karere TVNZ.

- GBP/NZD spot rate at time of writing: 2.0498
- Bank transfer rates (indicative range): 1.9780-1.9924
- FX specialist rates (indicative range): 1.9860-2.0314 >> more information

The New Zealand Dollar is one of the better performing major currencies at the start of the new week, with gains linked to improved investor sentiment helping to push the Pound-to-New Zealand Dollar exchange rate lower and back towards April lows.

The New Zealand Dollar has shown a positive correlation to broader risk sentiment, rising when markets rise and falling when they head lower. In sympathy with firmer global markets and commodity prices, the GBP/NZD exchange rate is quoted at 2.0504 at the time of writing, with our charts showing the April low to be 2.0422.

"In financial markets we see the traditional positive risk bias moves taking hold. U.S. Treasury yields are ticking higher, whilst the U.S. dollar is underperforming," says Richard Perry, analyst at Hantec Markets. "The Aussie and Kiwi are key outperformers,"

Global markets are moving higher as investors eye the end to lockdown measures across a number of the world's economies, which gives investors hope that the economic contraction triggered by the lockdowns could ultimately be mitigated and a return to normalcy will help overturn some of the damage.

"Stocks throughout Asia and Europe have kicked off the week in optimistic fashion, with the decline in coronavirus deaths across the globe being accompanied by a significant push towards easing lockdown measures across Europe and America," says Joshua Mahony, Senior Market Analyst at IG.

Markets could well start to shift away from the binary 'risk on' / 'risk off' approach it has adopted on currencies and instead potentially start to focus on country-specific issues, rewarding those currencies of countries that exit lockdown sooner and with vigour.

With New Zealand today declaring it had all but overcome cover-19, the prospects for the New Zealand economy to outperform its peers have increased, which should allow the NZ Dollar a premium.

"As Covid-19 curves start to flatten, financial markets move on to examine which economies may recover first and which may be saddled with legacy issues," says Chris Turner, Global Head of Markets and Regional Head of Research for UK & CEE at ING Bank N.V.

"The NZ lockdown has been implemented early, and wholeheartedly, and has delivered a clear peak in cases, making the prospect of a return to normality more likely than some Asian peers. The prospects for a second half recovery for New Zealand are looking very good and should support NZD," adds Turner.

New Zealand prime minister Jacinda Ardern on Monday declared the country had stopped the "widespread, undetected community transmission" of Covid-19, thanks to tough lockdown restrictions.

New Zealand will on Monday night ease strict lockdown measures, with Ardern saying the country had "avoided the worst" in the pandemic.

"There is no widespread undetected community transmission in New Zealand. We have won that battle. But we must remain vigilant if we are to keep it that way," said Ardern.

At 11.59pm on Monday, New Zealand will lift its level-4 lockdown which has been in place for more than four weeks.

During that time, almost all businesses have been closed, along with schools while the population has been asked to remain in their homes for all but supermarket visits and short walks.

While the New Zealand economy is likely to pick up some pace over coming weeks as a result of easing lockdown measures, there do however remain some significant headwinds for the currency.

Much of the New Zealand Dollar's value is derived from incoming tourism and external trade, notably with China, and for both sectors it appears that recovery will be some way off.

"A large share of New Zealand’s exports go to Asia, leaving it exposed to a global growth slowdown. The mix of lower export volumes, tourist arrivals, commodity prices and business confidence will continue to weigh on the NZD, despite recent outperformance from improving risk sentiment," says Daniel Been, Head of G3 & FX Research at ANZ.

Furthermore, the Reserve Bank of New Zealand (RBNZ) has implemented a sizeable and open-ended quantitative easing programme to defend the economy. While the printing of money to buy up government bonds can provide support for economic activity, it tends to lower the value of a country's currency.

Therefore, while there are some positive in sight for the New Zealand Dollar, headwinds continue to blow and it will take some time before 2020's losses are fully recovered.