Pound-New Zealand Dollar Could Target 1.9710 on Brexit Deal

- GBP/NZD rallies as Brexit deal said to be in pipeline.
- May see 1.9710 if deal announced - CBA.
- NZD/USD rally to 0.70 could cap GBP/NZD at 1.94.

© Adobe Stock

• GBP/NZD spot rate at time of publication: 1.9232
• Bank transfer rate (indicative guide): 1.7484
• FX specialist providers (indicative guide): 1.8865-1.8980
• More information on FX specialist rates here

The Pound-to-New Zealand Dollar exchange rate trades near multi-week lows amidst broad-based Kiwi strength linked to progress in development of a coronavirus vaccine, but good news concerning Brexit negotiations could prompt a recovery, according to Commonwealth Bank of Australia forecasts.

Sterling rose Tuesday following a report from The Sun suggesting that a Brexit trade deal could be announced early next week. 

British negotiator is reported to have told David Frost told Prime Minister Boris Johnson that a deal could be ready as early as Tuesday, although it's not clear if the conversation took place before or after his remarks on Sunday. 

"We expect GBP/USD to rally towards 1.3600 if there is material progress," says Elias Haddad, a strategist at Commonwealth Bank of Australia.

Frost said Sunday he would only agree a deal that  "takes back control of our laws, our trade, and our waters," warning that this "has been our consistent position from the start and I will not be changing it." For its part, the EU is reportedly willing to "find a creative solution" to a deadlock over its demands. 

Impediments to a deal include the EU's insistance on so-called level playing field terms that would preserve its influence and control in areas of economic policy, and pursuit of an automatic entitlement to a substantial share of sustainable fishing opportunities from British fisheries.

"Barring an optimistic article in The Sun newspaper, investors appear to still be making the assumption that UK/EU Brexit negotiations will prove fruitful. But caution is still warranted," says Clyde Wardle, Senior EM FX Strategist at HSBC.

Above: Pound-to-New Zealand Dollar rate shown at daily intervals alongside NZD/USD (black line, left axis). 

Thursday's EU leaders summit was once billed as the last minute deadline for national leaders to endorse an agreement and still leave time for it to be ratified in the various parliaments across Europe, although the Brexit transition period runs until midnight on December 31. 

The Pound-to-New Zealand Dollar rate rose from near three-month lows Tuesday but could rally to 1.9710 if NZD/USD remains around this weeks elevated 0.69 level and Haddad is right about a deal lifting GBP/USD to 1.36. 

GBP/NZD always closely reflects relative price action in GBP/USD and NZD/USD, although exactly how far it rises depends as much on price action in the main Kiwi exchange rate as it does Sterling.

Building strength in the New Zealand Dollar means that Sterling's capacity to sustain the above envisaged lofty level has been greatly reduced in recent weeks, with vaccine progress, the outcome of the U.S. election and a pivot at the Reserve Bank of New Zealand (RBNZ) each playing their part.  

{wbamp-hide start} {wbamp-hide end}{wbamp-show start}{wbamp-show end}

"We expect AUD/USD and NZD/USD to rally near 0.7500 and 0.7000, respectively, on a more encouraging global growth outlook," CBA's Haddad says. "The vaccine breakthrough is positive for the global growth outlook but a lame‑duck Trump administration has the potential to roil financial markets."

Moderna said this week that its coronavirus vaccine candidate was more-than 90% effective in clinical trials, barely a week after Pfizer also declared a similar achievement, leading to speculation that a global rollout could support the economic early next year. 

Vaccine progress supports CBA's forecast of a 0.70 NZD/USD rate in the coming weeks, which implies a GBP/NZD rate of just 1.94 even in the event that a Brexit deal does lift GBP/USD to 1.36 in the same period, demonstrating the extent to which Kiwi strength can curtail Sterling's recovery prospects.

The Pound could fall to new 2020 lows if a deal is not announced and the talks instead continue into year-end, potentially heralding a return of 'no deal' Brexit fears and outright declines in Sterling exchange rates.

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

Sterling would fall to 1.8935 and below the duo of important nearby technical support levels that have kept it supported above 1.92 if NZD/USD climbed to 0.70 and GBP/USD failed to make further gains from Tuesday's levels. The 50% Fibonacci retracement of Sterling's post referendum recovery at 1.9099 and the 200-week moving-average at 1.9167 have both offered solid support to the Pound-to-New Zealand Dollar rate in recent months. 

"Vaccine deployment won’t all be plain sailing, and things will still feel pretty tough as we go into 2021 given the lags in achieving inoculation and immunity, the still raging global pandemic, and the more pressing near-term issue of how NZ copes with a summer without tourists and a reversal in the fiscal impulse, all of which we need to overcome before a vaccine becomes widely available. But for now it’s sentiment driving markets and in that environment the risk is NZD goes higher," says David Croy, a strategist at ANZ.

The global recovery is supportive of the Kiwi due to its exposure to commodities, although weakness in the U.S. Dollar and the latest from the RBNZ are also helping to underpin the New Zealand Dollar. The U.S. election has reduced risks posed to the Chinese economy and New Zealand's largest trade partner by U.S. tariff policy, while the RBNZ indicated last week that it may longer cut interest rates as far as was previously suggested. 

The RBNZ lifted its 'unconstrained OCR forecast" by around 130 basis points for September 2021 last week, but still left the actual forecast sitting below zero, while recognising signs of a faster-than-expected economic recovery in New Zealand. It had warned for months that Kiwi rates could be cut below zero as it sought to aid the economy through the pandemic and protect its inflation target from currency strength, weighing on the New Zealand Dollar in the process.

"The RBNZ’s view remains consistent with further policy action. They may change their minds of course, but the November MPS contained an unconstrained OCR track that, while higher than previously, suggested the RBNZ believes another 70-80bp of easing is required," says Liz Kendall, an economist at ANZ. "Our new forecast is that the OCR will be cut to 0.1% in May, then be lowered to -0.25% in August – the same endpoint as we previously expected, but getting there in a more gradual, wait-and-see fashion. But it’s fair to say that the certainty around any specific OCR forecast has reduced, with a much more nuanced picture now."