Pound-to-New Zealand Dollar Rates As Good As They Get Until the RBNZ "Kills the NZD"

- GBP/NZD extends retreat from 2.05 top amid hope of vaccine progress.
- As NZD/USD enjoys robust recovery while GBP lags major counterparts.
- Brexit and BoE outlook can weigh on GBP even on market's good days.
- Keeps GBP/NZD aimed lower without RBNZ policy move to "kill the NZD."

Image © Pound Sterling Live, Still Courtesy of RBNZ

• GBP/NZD spot at time of writing: 2.0140
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The Pound-to-New Zealand Dollar rate slipped Tuesday as the Kiwi outperformed while Sterling lagged its antipodean counterparts, continuing a trend that threatens to progressively sink the exchange rate in the absence of further action from the Reserve Bank of New Zealand (RBNZ).

Pound Sterling ceded ground to the New Zealand Dollar Tuesday as the mood in markets brightened in response to signs of progress toward a coronavirus vaccine in the U.S., which were reported Monday as investors digested weekend remarks from Federal Reserve Chairman Jerome Powell, who sought to reassure the world that the U.S. central bank is far from out of ammunition when it comes to support for the economy. 

It's not clear that a vaccine will come in large enough numbers and soon enough to make a difference to the timetable for reopening the global economy, although the prospect of one arriving at any point has lifted global stock markets, commodity prices and exchange rates for currencies that are positively correlated with risk appetite like the Kiwi and Sterling. 

New Zealand Dollar gains were more substantial than those of Sterling Tuesday, which kept the Pound-to-New Zealand Dollar rate pointed lower for a second consecutive session and took it further away from the moving-averages between 2.04 and 2.05 that barred its path higher late last week. However, the exchange rate is at risk of even further declines in the weeks and months ahead. The Pound-to-New Zealand Dollar rate could fall between -2.5% and -4%, to within a 1.9285-to-1.9756 range, if the NZD/USD rate remains on its front foot and analyst forecasts for GBP/USD are borne out in price action. 

"RBNZ is considering buying foreign assets in the QE program as well (a de facto FX intervention to weaken NZD), which is even a tad crazier than the Riksbank ever became. It is safe to say that Orr and the RBNZ killed our AUD/NZD short (a bet on Chinese/US tensions) and based on the Swedish experiences, we would argue that RBNZ is about to kill the NZD," says Andreas Steno Larsen, a strategist at Nordea Markets. 

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

New Zealand's Dollar was the best performing major currency on Tuesday but had otherwise underperformed since the RBNZ doubled its quantitative easing limit from NZ$30bn to NZ$60bn. The Kiwi remains at risk from the RBNZ given the bank is saying it could resort to negative interests and that it's also contemplating a foreign asset purchase programme which would see it selling the Kiwi and buying foreign currencies to weaken the exchange rate.

Any decision to actually go ahead with such policies would risk sinking the New Zealand Dollar, although even this radical policy bent might not be enough to prevent the Pound-to-New Zealand Dollar rate from declining further in the short-term, especially as the Bank of England (BoE) is also now talking about a possible shift to negative interest rates. This is at a point when markets were already expecting it to increase the size of its quantitative easing programme in June so as to soak up more of the greatly expanded supply of government bonds that are expected to hit the market as a result of the coronavirus. 

"Andy Haldane had been cited in the Telegraph over the weekend," says Lee Hardman, a currency analyst at MUFG. "The comments suggest that the BoE is more seriously considering the case for negative rates if required. In contrast to the Fed who have more clearly ruled out negative rates in the foreseeable future. We are still not convinced though that negative rates will be implemented in UK when there is room for other policy options such as extending QE. The heightened uncertainty is set to remain a weight on the pound."

Kiwi policy pains are acute and may one day support the Pound-to-New Zealand Dollar rate but for the time being the antipodean economy is making good progress out of 'lockdown' after a succesful effort to contain the coronavirus and China is also getting back to more normal levels of activity, which has helped sustain the New Zealand Dollar's recovery off March lows. Meanwhile, Sterling is steadily succumbing to a noxious cocktail of risks. 

Above: NZD/USD rate shown at daily intervals alongside GBP/USD rate (red line). 

BoE policy could weigh on the Pound up ahead but Brexit is also coming back into the picture and the UK remains on course to be the last major economy to actually exit the lockdown used to contain the coronavirus, which could see the UK left behind economically by the rest of the developed world. Only "limited progress" has resulted from the Brexit trade talks with just one more round to go before a deadline that will see Prime Minister Boris Johnson choose between requesting an extension of the transition and abandoning talks altogether in favour of renewed preparations for a 'no deal' Brexit after year-end. 

"Given the scale of the economic crisis that Britain is entering into, it may be wise for investors to keep an open mind as to monetary policy developments over the next year or so in the UK and beyond. The fact that the money market continues to price in a dip into negative rates suggests they are doing just that. This factor combined with Brexit risks and criticism of the government on its handling of the Covid-19 crisis suggest the potential for further pressure on the pound. We see downside risk to our longstanding target of GBP/USD1.19,"  warns Jane Foley, a senior FX strategist at Rabobank. 

Prime Minister Boris Johnson has come under fire over his handling of the coronavirus and, much like with President Donald Trump and his pre-election tactics for dealing with China, the PM might now also feel compelled to retrench into a hardline position on the trade talks for domestic political reasons. Requesting an extension of the transition period, in contravention of electoral pledges and oft repeated rhetoric, may now be more difficult and less palatable as a policy option - which is a risk to the Pound.

Above: NZD/USD rate shown at daily intervals with Fibonacci retracements of 2020 downtrend marked out.

Some analysts say the market will begin to worry in June about the prospect of a 'no deal' Brexit playing out at year-end, which could manifest itself in further losses for the Pound against its major rivals that endure irrespective of the broader market mood toward risk currencies like Sterling and the Kiwi. This is widely expected to push the GBP/USD rate down to 1.2030 at least, with good odds for even further subsequent losses beyond there, which would lead the Pound-to-New Zealand Dollar rate to fall from 2.0140 to 1.9756 even if the Kiwi did not rise any further against the U.S. Dollar from Tuesday's levels.

The reality and rub for Sterling however, is that the risk-on mood in the market lifted the NZD/USD rate above the 61.8% Fibonacci retracement of its 2020 downtrend on Tuesday, which could clear the path for a move up toward the 78.6% retracement at 0.6238 over the coming days and weeks. That latter level of NZD/USD would lead the Pound-to-New Zealand Dollar rate to fall to 1.9285 if GBP/USD also declines to 1.2030, although losses would be even more severe for the British currency if the 1.20 threshold of GBP/USD gives way, as a growing number of analysts anticipate that it will.

This could mean that Tuesday's Pound-to-New-Zealand Dollar rates are about as good as they're likely to get unless and until the RBNZ "kills the NZD," given that GBP/NZD is an amalgamation of GBP/USD and NZD/USD, although such rates would only be available at interbank level with those quoted to retail and SME participants likely much lower. Specialist payments firms can help squash the spread between interbank and retail rates.

Above: GBP/NZD at weekly intervalswith Fibonacci retracements of 2016 fall marked out, GBP/USD rate (red line).