Pound-New Zealand Dollar Forecast: The Downside Prevails

- GBP/NZD pointed lower this week
- Market backdrop advocates for broad-based NZD gains
- But Goldman Sachs prefer AUD to NZD

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- GBP/NZD spot rate at time of writing: 2.0339
- Bank transfer rates (indicative guide): 1.9627-1.9770
- FX specialist rates (indicative guide): 1.9900-2.000 >> more information

Pound Sterling's recent retreat against the New Zealand Dollar is likely to extend over the course of coming days, according to technical readings of the market and an assumption that the current recovery in global markets and commodity prices extends.

The Pound-to-New Zealand Dollar exchange rate has fallen to 2.0330 at the start of the new week, as an ongoing decline from the March-April highs at 2.10 extends.

The short-term decline is defined by a clear trend line, that appears to remain intact and therefore should guide prices lower:

A break above the trend line would be one signal we would consider when assessing whether the decline is coming to an end.

But, from a purely technical perspective, the downside is to be favoured owing to the observation that the exchange rate is below the 20 day moving average and 50 day moving average, noted at 2.4510 and 2.0499 respectively. Should the price move above the moving averages then we would be more inclined to start favouring a more sustained period of Sterling appreciation against its New Zealand counterpart.

Analysis from Trading Central - a bespoke technical analysis provider - meanwhile shows that as long as GBP/NZD remains below a resistance level located at 2.0401, the downside will likely prevail. Trading Central forecast declines to 2.01921 first, and then 2.0141, as long as the current market structure remains in place.

The current fundamental backdrop of rising commodity prices and stock markets favours the New Zealand Dollar over Sterling, as the Kiwi Dollar is highly leveraged to the global growth story courtesy of New Zealand's strong trade links with China.

Asian and European markets start the week on a solid footing amidst ongoing confidence that the worst of the coronacrisis has now passed, with investors looking to the a recovery now that the world's economies are opening up once more.

The sentiment is most clearly expressed in the value of oil, which continues to recover rapidly on a combination of improving demand and restricted supply as the crisis ends the lives of many marginal producers.

The global economic recovery story is being lead by China which was the first country to lock down owing to the crisis, and was the first to open up again. This is proving beneficial for the New Zealand Dollar as China is New Zealand's largest export market, accounting for the lion's share of demand for New Zealand dairy products, lamb products, timber and other primary industrial output.

As long as investor sentiment continues to improve, we would expect the likes of the NZ Dollar and Aussie Dollar to appreciate.

"Market sentiment continues to hold up in recent weeks, despite a rolling roster of heartbreakingly bad economic data, especially on the labour market front. News that more countries are easing lockdown has helped," says Wellian Wiranto, Economist at OCBC Bank.

OCBC's Market Stress Index shows that global market anxiety is now at just one-third of the late-March peak level, driven by a broad normalisation of counter-party risk and volatility measures on the back of the hefty support being offered by the Federal Reserve.

While encouraging, OCBC do warn that a host of potential bugbears remains on the horizon and continue to demand a close watch.

"The risk of new waves of infection is still breathing down our neck. So does any escalation of US-China tensions," says Wiranto. Any flare-ups in market anxiety are likely to hamper the New Zealand Dollar's progress against the likes of the U.S. Dollar, Euro and Pound Sterling.

While the New Zealand Dollar is favoured against a host of other currencies in the current backdrop, Goldman Sachs are expecting the Australian Dollar to maintain the upper hand over its antipodean cousin.

Strategists at the Wall Street investment bank have said they see more upside ahead for AUD/NZD.

"We continue to recommend investors stay long the Australian Dollar versus the New Zealand Dollar," says Zach Pandl, co-head of global foreign exchange and emerging market strategy at Goldman Sachs in New York.

Goldman Sachs see relative monetary policy between the Reserve Bank of New Zealand and Reserve Bank of Australia as being a driver of expectations for Aussie Dollar outperformance.

"The RBNZ appears much closer to further easing (including rate cuts into negative territory) than the RBA, and we see room for more to be priced, given the front-end implies just one 25bp cut to 0% over the next year, even after the RBNZ’s clearly dovish meeting last week," says Pandl.

The strategist also notes Australia commands a more favourable growth outlook than New Zealand, "and Australia’s greater exposure to China demand (and commodity prices more broadly) should benefit Aussie more than Kiwi as China’s industrial activity continues to recover," adds Pandl.