Pound-New Zealand Dollar Forecast: Downside Fades at Key Support, RBNZ Policy in Focus

- RBNZ is this week's event highlight
- GBP/NZD downside fades at key support
- Market sell-off weighs on NZD

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• GBP/NZD spot rate at time of publication: 1.9203
• Bank transfer rates (indicative guide): 1.8525-1.8659
• Transfer specialists (indicative guide): 1.85871.9024
• More information on specialist rates here

The Pound is under widespread pressure at the start of the new week amidst a cocktail of stock market weakness, signs of fresh covid restrictions in the UK and ever-present Brexit anxieties, however the currency is holding ground against the New Zealand Dollar with GBP/NZD seen trading 0.40% higher at 1.9180 at the time of publication.

The New Zealand Dollar is underperforming the majority of its peers as the currency typically exhibits a 'high beta' to stock markets - i.e. it has a positive correlation with the world's leading stock indices, such as the S&P 500. Therefore it stands that when markets are in the red so too is the New Zealand Dollar.

Driving a deterioration in investor sentiment at the start of the new week is a meltdown in financial stocks as big banks have been accused of maintaining a light touch approach to money laundering. The revelations have seen markets price in the potential for significant fines and potential legal actions.

"Banks are being whacked: HSBC, Barclays and Standard Chartered shares fell after being named in a report on trillions of dollars of suspicious transfers being funnelled through the banks. JPMorgan, HSBC, Standard Chartered Bank, Barclays, Deutsche Bank and Bank of New York Mellon were all named in the so-called FinCEN files. The report from the International Consortium of Investigative Journalists centres on more than 2,100 suspicious activity reports filed by banks and other financial firms with the U.S. Department of Treasury’s Financial Crimes Enforcement Network," says Neil Wilson, Chief Market Analyst at Markets.com.

Also contributing to the deterioration in investor sentiment is Europe's surging wave of covid-19 infections which has left authorities scrambling to introduce fresh restrictions, with the UK government expect to follow Spain and announce fresh initiatives to halt the spread of the virus on Tuesday.

England's Chief Medical Officer Professor Chris Whitty has given a live televised broadcast to the nation alongside Sir Patrick Vallance, the Chief Scientific Advisor, where he warned the spread of the virus is "heading in the wrong direction" and that Britain faces a "very challenging winter period"

Vallance told a press briefing on Monday that the situation requires, "speed, action, and enough" - or else we might be looking at 50,000 cases a day by the middle of next month.

Prime Minister Boris Johnson will address Parliament on Tuesday with political commentators saying it is at this appearance that he will likely spell out fresh restrictions.

While the news is negative for Sterling - as restrictions are likely to hamper economic activity - the Pound has held ground against the New Zealand Dollar and a number of other G10 currencies.

The Pound-to-New Zealand Dollar exchange rate's daily chart is reflecting this resilience and is showing a run of September declines has brought the pair back to a significant support level:

Above: GBP/NZD daily chart

The chart above shows GBP/NZD has fallen back into a tight band of support, identified by the round number level of 1.90 at the bottom and 1.92 at the top. The market appears to display substantial support qualities in this region and those adherents of technical analysis will therefore find it unsurprising that Sterling is showing a little more resilience in this area.

It will likely take a substantial deterioration in sentiment towards Sterling for this band to break, and we would therefore expect sideways action to emerge over coming days.

Looking at the New Zealand side of the pair, the highlight of the week is Tuesday's Monetary Policy Review from the Reserve Bank of New Zealand (RBNZ).

The RBNZ has been one of the most dovish central banks - i.e. it has favoured aggressive cuts to interest rates and generous quantitative easing, which has contributed to NZ Dollar underperformance in 2020.

Markets will therefore be on the lookout for more of the same, with any signs the RBNZ will bring forward further easing likely to weigh. Markets will be particularly interested to hear if cutting interest rates to 0% and below is imminent.

However the August Monetary Policy Statement was heavy with details of future policy moves and economists at New Zealand lender ASB expect the RBNZ to make no changes to the OCR, forward guidance, and Large Scale Asset Purchase parameters this September.

ASB’s base case scenario is for the RBNZ to cut the OCR to ‑0.50% and introduce a Funding for Lending Programme by April 2021.

However, strategists at ANZ Bank are expecting the event to be on balance unsupportive for the Kiwi Dollar.

"We expect a dovish tone at next Wednesday’s Monetary Policy Review, reiterating that a lower OCR and bank “funding for lending” program are next up.
In our view the RBNZ is unlikely to change its forward guidance that the OCR will be left unchanged until March," says Daniel Been, Head of G3 & FX Research at ANZ Bank.