Pound-New Zealand Dollar Touches 1.98 and Retreats, but Downside seen Limited Owing to Kiwi's Headwinds

Modified: Monday, 26 October 2020 12:29 BST

- NZD leads the pack at start of new week
- But gains tipped to be limited to the near-term
- Closed borders to prompt aggressive RBNZ action

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GBP/NZD spot rate at time of writing: 1.9492
Bank transfer rate (indicative guide): 1.8810-1.8946
FX specialist providers (indicative guide): 1.9210-1.9317
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The New Zealand Dollar starts the new week on the front foot against all its major peers as it looks to extend a multi-day period of gains, however the extent of the gains are likely to remain limited according to a number of foreign exchange analyst we follow.

Analysts say strength in the New Zealand currency should remain limited by expectations for aggressive easing at the Reserve Bank of New Zealand (RBNZ) in anticipation of months of economic underperformance linked to the closure of the country's borders with the outside world.

The Pound-to-New Zealand Dollar exchange rate had been moving higher until last week when it touched a high of 1.98 and subsequently reversed amidst a broad-based recovery in the antipodean currency. There is no tangible trigger to the New Zealand Dollar's recovery, but some of the gains were said to be linked to the decisive outcome of the just-held general election.

Above: NZD outperforms major peers at the start of a new week

The New Zealand Dollar went higher at the start of the last week against the U.S. Dollar and a number of other majors, "with the market approving of the clear-cut election result and continuation of the status quo, which has generally been a period of NZD strength," says David Croy, Strategist at ANZ Bank.

The GBP/NZD exchange rate has since fallen back to levels around 1.95 where it is seen at time of publication.

Above: GBP/NZD daily chart. If you would like to secure current rates for use over coming weeks or months, please find out more here.

Losses in GBP/NZD should remain limited given sentiment towards Sterling is relatively elevated given the increased prospects of a EU-UK trade deal being reached over coming weeks, an outcome that was this week reinforced by news reports that suggested good progress is being made in the current round of intensive negotiations taking place in London.

"Recent acrimonious negotiations are mostly posturing," says Zach Pandl, an economist with Goldman Sachs in New York. "Both sides appeared to show some more flexibility on outstanding issues like level playing field arrangements and fisheries, and each was satisfied enough to take negotiations to the next level."

The risks to the GBP/NZD exchange rate are said to be tilted to the upside in the event of a deal being reached according to foreign exchange analyst, however with some substantial areas of disagreement remaining, particularly over fishing, near-term volatility and bouts of GBP weakness cannot be discounted.

Analysts at Barclays have told clients they believe recent New Zealand Dollar strength is "unlikely to extend" and that they "expect the NZD to weaken again".

In a weekly currency briefing, Barclays says "broad USD weakness is driving NZD strength but that should weaken closer to the RBA and RBNZ (11 Nov) meetings."

Expectations for the RBNZ to cut interest rates into negative territory have risen of late after the publication of below consensus inflation data for the third quarter which came in at 0.7% quarter on quarter.

The year-on-year rate came in at 1.4%, which is some 40bp below the RBNZ's forecast.

RBNZ Governor Orr said he would prefer to see high inflation than "the real challenge of battling deflation". He believes the series of monetary tools that the bank is currently working on can be "highly effective and efficient" and emphasised his wish to see more capital to be put to work.

Domestically, the New Zealand economy holds an advantage over many peers in that the elimination of community-spread covid-19 has allowed the economy to reopen to some extent.

However, a perpetual drag comes in the form of borders remaining closed, something that Statistics New Zealand said accounted for 5.8% of the country's GDP in 2019.

This is a substantial source of economic growth, and one that will unlikely ever be replaced by a pick-up in domestic tourism.

"The easing of lockdowns is helping activity bounce. Better weather is also helping commodity exports," says David Forrester, a strategist at Credit Agricole, but "while international borders remain closed, NZ will struggle.

"The are signs the NZ economy is bouncing back, but growth is likely to remain sub par," Forrester writes in a research note.

The implications of New Zealand's borders staying closed are is a pervasive drag on economic growth, something that will likely prompt further easing at the Reserve Bank of New Zealand.

Credit Agricole forecasts a fall from 0.6670 to 0.65 by year-end 2020 for NZD/USD, which is not expected to return to its late September high of 0.68 until the same time in 2021.

The bank looks for NZD/USD to leap to 0.70 and its highest since late 2018 in the three months to year-end 2021, which is also when the borders reopen.

The Pound-to-New Zealand Dollar rate is forecast to end 2020 at 2.0, before declining back to the bottom of its recent range around 1.92 in 2021.