New Zealand Dollar Tipped to Retain Advantage against the Pound

- NZD outperforms amidst improved global investor sentiment
- GBP/NZD to trend lower
- But ANZ remain wary of NZD recovery potential
- NZ close to completely eradicating covid-19

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• GBP/NZD spot rate at time of writing: 1.9891
• Bank transfer rates (indicative guide): 1.9190-1.9330
• FX specialist rates (indicative guide): 1.9480-1.9700
• More information on specialist rates here

The New Zealand Dollar starts a new week and month on a firm footing, advancing against all its major rivals apart from the Australian Dollar amidst an environment of positive investor sentiment that sees global stocks and commodity prices trend higher.

The New Zealand Dollar's gains - as well as those of the Aussie Dollar - confirm the two currencies retain a positive correlation with global investor sentiment, rising and falling with equity markets and we therefore expect the advance to extend as long as broader sentiment remains constructive.

"While U.S. President Trump levelled plenty of criticism on China and went as far as to strip Hong Kong of its ‘Special Status’- he didn’t formally escalate tensions with China. There is relief across markets – particularly those sensitive to China like Hong Kong shares and the Australian Dollar," says Jasper Lawler, Head of Research at LCG. "A surprise expansion in Chinese manufacturing in May according to data from Caixin added to the optimism."

The New Zealand Dollar latched onto the advance in risk sentiment, with the New Zealand-to-U.S. Dollar exchange rate rallying half a percent to trade at 0.6626, while the Pound-to-New Zealand Dollar exchange rate fell marginally to reach 1.9903.

From a technical perspective the Kiwi appears to now be locked into a firm trend of appreciation against the U.S. Dollar, Pound and Euro and we see little reason to stand in the way of the trend at the current juncture.

We see the GBP/NZD exchange rate now capped by the 2.0 psychological resistance area in the near-term and we expect any strength in Sterling to be met by selling pressure around this level over the course of coming days.

The fundamental global backdrop is of course underpinning the positive technical setup in NZD pairs, with supportive conditions fuelled by a global economy that appears to have reached a bottom and a gradual unlocking of restrictions will likely fuel improvements in sentiment.

"NZD rose by 1.3% on a trade‑weighted basis in May," says Kim Mundy, FX Strategist at Commonwealth Bank of Australia, "improving global economic data (suggesting April will be the nadir for economic activity) supported NZD."

The outlook for the New Zealand Dollar will likely remain constructive provided stocks and commodity prices continue to appreciate in expectation of a broad recovery in the global economy. Expectations for further medical breakthroughs in the quest to overcome the diseases, as well as the exit from lockdown by the world's largest economies, are underpinning the overall positive risk environment.

However, should market sentiment fade, the NZ Dollar would likely give up some of its recent gains. Expectations for a turn lower in the currency meanwhile remains a base-case expectation at New Zealand and Australian lender ANZ Bank.

"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.

For now however the domestic fundamentals regarding the New Zealand Dollar remain broadly supportive, with the currency finding some positive sentiment on the view that the country is able to return back to normal relatively swiftly when compared to other developed market rivals.

New Zealand has one remaining covid-19 case, confirming the country is on track to be one of the first in the world to completely eradicate the virus.

New Zealand last reported a new case of covid-19 ten days ago, with media reporting the final case being that of an Auckland woman in her 50s who was diagnosed May 01. The last recorded death was a week ago and more than 1,100 people have recovered.

The virtual eradication of covid-19 will allow authorities to act with greater confidence when repealing lockdown measures, but it also allows the consumer confidence to bounce back in sharper fashion.

A critical component of any economic recovery will be the recovery of consumer confidence, and it goes without saying that a population that is confident it won't be exposed to covid-19 will be a more confident population when going about day-to-day business.

"We could see a sharp rebound in NZD," says Marshall Gittler, Strategist at BDSwiss. "New Zealand had the strictest lockdown of any of the G10 countries, but as a result it has also lifted it most rapidly. That should help the country to recover quickly."

Gittler says just as the slowdown in the world's economies was a function of the severity of the lockdown, so too the rebound in each economy is likely to be in part at least a function of the lifting of the lockdown.