New Zealand Dollar's Accelerating Rally means GBP/NZD is now at a Loss for 2020

Modified: Wednesday, 03 June 2020 10:29 BST

- NZD rallies as global, domestic backdrop continues to improve
- GBP/NZD now at a loss for 2020
- CBA raise NZD forecasts

Above: PM Jacinda Ardern delivers an address concerning covid-19 on Tuesday. Image (C) Pound Sterling Live, still courtesy of nzherald.co.nz

GBP/NZD spot rate at time of writing: 1.9674
Bank transfer rates (indicative guide): 1.8980-1.9120
FX specialist rates (indicative guide): 1.9200-1.9490
More on acquiring market beating rates here

The New Zealand Dollar has overturned its 2020 losses against the Pound and now stands 0.40% higher for the year, courtesy of the strong rally experienced over the course of the past month that could extend into the near future.

Hitching a ride with the rally in equity markets and commodity prices, the New Zealand Dollar hit its highest level against the Pound since January 07 in mid-week trade when GBP/NZD fell to 1.9589, and there appears little evidence that the decline is about to fade.

"The strengthening of the risk-linked Aussie and Kiwi, combined with the weakness of the safe-havens dollar, yen, and franc, suggests that investors continued increasing their risk exposures for another day," says Charalambos Pissouros, Senior Market Analyst at JFD Group. "It seems that investors are still looking past the US-China tensions and the civil unrest in the US."

Some financial market commentators have expressed surprise as to why the civil unrest in the U.S. has not been felt by stock markets and currencies, expecting some negativity to be shown. What they fail to consider is that the domestic disturbances appear to have consumed President Donald Trump's attention, meaning the steady flow of negative rhetoric on China that we have become accustomed to has ceased somewhat.

A lack of headlines surrounding U.S.-China tensions have therefore allowed some positivity to return to global markets and is allowing assets like stocks, commodities and the Aussie Dollar a free pass higher.

We would expect this rally to however be challenged when tensions start to rise again, which we see as highly likely given Trump will want to pursue a competitive approach towards China ahead of the November presidential election.

For now though, the New Zealand Dollar is on a tear higher, soaking up the ongoing improvement in investor appetite and a supportive domestic backdrop that will see the New Zealand government soon announce a complete end to covid-19 restrictions due to the virtual eradication of the virus in the country.

"With the health and financial crisis under greater control, market participants are focusing on the global economic recovery," says Joseph Capurso, FX Strategist at Commonwealth Bank of Australia.

The Pound-to-New Zealand Dollar exchange rate is now at its lowest level since January 07, with technical evidence hinting the decline can extend towards support in the 1.9460 area:

The New Zealand-to-U.S. Dollar exchange rate is meanwhile quoted 0.40% higher on the day at 0.6407 with the short-term rally pushing the exchange rate back towards March highs, with more gains likely according to a leading analyst.

"NZD/USD built on this week’s gains to just above 0.64. A high terms of trade will also be a key fundamental support for NZD. We now forecast NZD/USD will lift to 0.65 by the end of 2020," says Capurso. "We lift our AUD, NZD and CAD forecasts because of firm commodity prices and a quicker recovery in the Chinese economy."

The domestic picture in the country continues to improve as the New Zealand government signals it is ready to lift all remaining lockdown restrictions put in place to stop the spread of covid-19.

After recording no new coronavirus cases for an 11th consecutive day, Prime Minister Jacinda Ardern said on Tuesday "our strategy of go hard, go early has paid off."

https://news.sky.com/story/coronavirus-new-zealand-could-lift-all-lockdown-restrictions-next-week-after-11-straight-days-with-no-new-cases-11999176

"In moving to level one so soon, we will be one of the first countries in the world to have experienced a COVID-19 outbreak and then return to that level of normality so quickly," added Ardern.

The move will in turn take the pressure off the Reserve Bank of New Zealand (RBNZ) to offer further measures to support the economy. One pillar of bearishness towards the NZ Dollar over recent weeks has been a view that the RBNZ could slash interest rates further, taking them into negative territory in order to further support businesses and consumers.

Such a move was seen as being a headwind to the New Zealand Dollar, as the FX textbook suggests those countries with low interest rates relative to peers should experience currency weakness.

But the justification for further cuts at the RBNZ now appear to be losing credibility, given the overcoming of covid-19 in New Zealand and a steadily improving global picture.

The outlook for the New Zealand Dollar therefore remains bright, but only if the global recovery remains on track and trade tensions between U.S. and China don't blow up.