Pound-New Zealand Dollar Breakdown Aided by RBNZ as Downside Risks Grow

- GBP/NZD edges lower on robust risk appetite, central bank announcements.
- Headed for bottom of 1.91-to-1.97 range but risks break to even lower levels.
- Bearish GBP/USD price action, NZD/USD resilience, warns of trip to 1.8350.

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The Pound-to-New Zealand Dollar exchange rate remained near 2020 lows ahead of the weekend after the Reserve Bank of New Zealand (RBNZ) said it intends to slow the pace of its government bond buying, but Sterling remains at risk of even further losses in the coming weeks.

Pound Sterling was an underperformer for a second consecutive session Friday and quoted -0.09% lower at 1.9312 against the New Zealand Dollar after edging further down in its 1.90-to-1.97 trading range, the bottom of which could come into view over the coming days. 

The Pound-to-Kiwi rate was helped lower by weakness in Sterling and resilience in the New Zealand Dollar following announcements made by their respective central banks. The RBNZ set out plans Friday to acquire a lesser volume of Kiwi government bonds under the Large Scale Asset Purchase programme.

New Zealand's central bank will buy NZ$940mn next week, down from NZ$1.075bn, and will also unveil its June policy decision on Wednesday.

"While there is unlikely to be any change in policy rates, we expect it will restate its willingness act further, if required. It would prefer NZD to be lower, but with pandemic containment a ‘good news story’ and risk appetite still elevated, any jaw-boning is unlikely to have a lasting impact," says Daniel Been, head of FX research at ANZ. "Fair value is 0.65; strategically we’re neutral with risks in both directions, but the scales possibly tipped a tad lower just now."

This is after the Bank of England (BoE) said Thursday it will also slow its pace of bond buying despite having announced the intention to acquire £100bn more of them by year-end. Both announcements reflect progress in stabilising markets following the March coronavirus-related liquidity crisis as well as a global central bank shift into wait-and-see mode given uncertainty over the level of additional support that might be required going forward.

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

Policy uncertainty has risen with the tentative reopening of economies from 'lockdown' which, absent a destabilising second wave of the coronavirus, marks the beginning of a global economic bounceback that favours commodity currencies over the likes of the Sterling. This has already weighed heavily on the Pound-to-New Zealand Dollar rate in recent weeks, where losses have been the result of both weakness in the Pound as well as strength in the Kiwi. 

"Risk sentiment is expected to remain firm into year-end, supported by unprecedented global central bank and government stimulus. In addition, NZ’s economic rebound has been slightly stronger than previously expected. All that should help NZD/USD end the year at around 0.6500. In the interim, there remains potential for a pullback to 0.6200 on bouts of risk aversion, for example if the recent phase of positive NZ data surprises flips to data disappointments," says Imre Speizer, head of NZ strategy at Westpac. 

Kiwi strength stirred by an early domestic arrest of the coronavirus and a global reopening has lifted NZD/USD back toward the 0.66 handle it was holding on entry into 2020, although it was trading at 0.6430 Friday, while the Pound has fallen from 1.31 to 1.24 against the U.S. Dollar.

That divergence of fortune explains the -1.69% 2020 decline as well as the -4.8% three-month loss for the Pound-to-Kiwi rate, which is an amalgamation of GBP/USD and NZD/USD. 

The rub for the Pound-to-New Zealand Dollar rate is that without a substantial pickup in GBP/USD, it's condemned to a steady grind back to levels not seen since 'no deal' Brexit fears were at fever pitch in 2019.

An NZD/USD rate of 0.6450, the middle of its recent range, implies a Pound-to-Kiwi rate of 1.9034 if GBP/USD continues in the southbound direction of the 38.2% Fibonacci retracement of its March-to-April recovery rally at 1.2277. 

Above: NZD/USD rate shown at daily intervals with 200-day moving-average and GBP/USD in black.

"GBP/USD recently failed at the 78.6% retracement at 1.2818 (of the move down from the March peak) and has now eroded the short term uptrend and the 55 day ma at 1.2419," says Karen Jones, head of technical analysis for currencies, commodities and bonds at Commerzbank. "Below the 55 day ma alleviates topside pressure and triggers a slide back to 1.2278 and the 50% retracement of the March-to-April advance at 1.2110."

That takes it below the 1.9137 reported as a looming possibility by Pound Sterling Live back on April 21, and would leave it trading near to the 200-week moving average of 1.8962 that technical analysts might expect to offer the exchange rate some short-term support.

But there are still multiple scenarios in which even lower levels could play out, with the most adverse involving a GBP/USD rate that goes on falling while NZD/USD resumes it climb. Any steeper losses that take GBP/USD below its 1.2277 support level and toward the 50% Fibonacci retracement at 1.2111 would send the Pound-to-Kiwi rate down to 1.8776 if NZD/USD holds 0.6450, and 1.8350 if NZD/USD makes it back to 0.66 while Sterling falls.

This leaves a lot to be determined by the Brexit process and developments in the UK economy, not to mention risk appetite in the wider market that is key to the performance of NZD/USD.

Bouts of risk aversion occasionally lift the Pound-to-Kiwi rate but with GBP/USD trading at the above described levels, the NZD/USD rate now has to fall all the way back to 0.62 just in order to lift GBP/NZD to the top of its 1.91-to-1.97 range, which reflects a move lower in Sterling's likely range.  

The above rates would only available at interbank level however, with those quoted to retail and SME customers likely much lower. Some High Street banks were already quoting between 1.8573 and 1.8708 Friday. Specialist firms can help squash the spread between interbank and retail rates.

Above: Pound-to-New Zealand Dollar rate shown at weekly intervals with Fibonacci retracements of post-referendum recovery and key moving-averages. 200-week moving-average in light green and below market price.