New Zealand Dollar Strength Aids a Nervous Breakdown in GBP/NZD

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• GBP/NZD spot rate at time of publication: 1.9048
• Bank transfer rate (indicative guide): 1.8440-1.8570
• FX specialist providers (indicative guide): 1.8825-1.8940
• More information on FX specialist rates here

New Zealand's Dollar proved resilient on Thursday to the overtures of a recuperating U.S. rival after having clocked new highs in the overnight session, with strength in the Kiwi currency helping to exacerbate a nervous breakdown in the Pound-to-New Zealand Dollar rate. 

The New Zealand Dollar ceded less than one tenth of a percent to a U.S. greenback that rose as much as 0.60% against other major commodity currencies on Thursday, while putting an almost equally resilient performance relative to classic safe-havens like the Japanese Yen and Swiss Franc. 

"Global sentiment remains elevated, and the NZ economy has outperformed most since Covid started," says Imre Speizer, head of NZ strategy at Westpac, who's been tipping an NZD/USD run at the 0.70 level of late. "NZD/USD momentum remains positive, the next major technical target being 0.7060. That said, it is starting to look technically stretched, so that gains beyond 0.7100 may not be sustainable near term."

Enabling the Kiwi's standout performance this week and in November has been a landmark shift in the rhetoric and perceived policy stance of the Reserve Bank of New Zealand (RBNZ), a series of positive coronavirus vaccine developments and unease in Wellington about surging Kiwi house prices. 

The RBNZ's pivot has led investors to abandon earlier weighty wagers that interest rates would be cut below zero next year, in turn driving in a rally in New Zealand bond yields that have left counterparts in the dust this month despite strengthened investor risk appetite that has crushed negatively correlated bond prices the world over. 

"Watching out for house prices will make the RBNZ more gradualist. That makes near-term OCR cuts less likely. Our OCR forecast is under review. However, we still favour monetary easing at some point due to the closed border, low inflation, the rising exchange rate, the LSAP running out of fuel, et al," says Dominick Stephens, chief NZ economist at Westpac. 

Above: NZD/USD at daily intervals with Pound-to-New Zealand Dollar (yellow line, left axis). 

New Zealand's Dollar pushed the NZD/USD rate above 0.70 overnight and into Thursday, around which it consolidated throughout the European session as Pound Sterling and other major currencies beat a retreat from the U.S. Dollar. 

The result has been to exacerbate a nervous breakdown in the Pound-to-New Zealand Dollar rate that was made worse on Thursday by a UK government decision to extend November's 'lockdown' in all but name.

"NZD/GBP has overcome jitters earlier this week and now looks set to break higher. A break of 0.5260 would usher in a move towards 0.5380," says David Croy, a strategist at ANZ, referring to equivalents of 1.9011 and 1.8587 for GBP/NZD. "Technically [NZD] looks strong (against the USD and on most crosses)."

Prime Minister Boris Johnson's government replaced the blanket national 'lockdown' with an enhancement of the three-tier system that was jettisoned earlier this month when Downing Street imposed another all out shutdown. 

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But for almost half of the population in England - which accounts for more than 80% of the UK's overall population - local economies will continue to be disrupted by restrictions on supposedly non-essential businesses.  

Already the economy was expected to contract again in the final quarter following November's closure, although the bill is now set to grow with the extended encumberance, all the while reported progress in the Brexit negotiations is yet to result in an agreement between the two sides. 

Sterling broke below a major Fibonacci retracement level on the charts Thursday in what is a potentially bearish development for the British currency, after slipping below its 200-week moving-average in time for last Friday's close. 

The two levels, located at 1.9175 and 1.9095 had provided the exchange rate with solid support throughout 2020, although with the UK economy mired in a double dip recession and just weeks away from the December 31 end to the Brexit transition period new lows are tentatively beckoning the British currency. 

Above: GBP/NZD at weekly intervals with Fibonacci retracements of post-referendum recovery, 200-week average in black.

On Brexit European Commission chief Ursula von der Leyen said Wednesday that "genuine progress" had been achieved in the Brexit negotiations but that the risk of failure remained. When the EU has asked for, or simply spoken of "progress" over recent years, it's almost always been in reference to compromises on the part of the UK.

Meanwhile, Prime Minister Boris Johnson told parliament that "our position on fish hasn't changed. We'll only be able to make progress on if the EU accepts the reality that we must be able to control access to our waters," while saying nothing in relation to other contentious European demands including the for so-called level playing field terms around state aid, environmental regulation and taxes as well as other non-environmental taxes.

Von der Leyen implied when addressing the EU parliament on Wednesday that there's been progress in relation to these issues too, saying "In the discussions about state aid, we still have serious issues, for instance when it comes to enforcement."

The EU has demanded from the get-go that Britain remain bound by all of its rules in the above areas while the political declaration accompanying the EU withdrawal agreement, when combined with new powers afforded to Brussels by the EU27 in July, implies scope for the EU to pursue new powers over the UK including in relation to tax matters where it never had competence during the country's period of official membership.

PM Johnson has so-far resisted all of those demands, while British negotiator David Frost said in his last official remarks; "We are working to get a deal, but the only one that's possible is one that is compatible with our sovereignty and takes back control of our laws, our trade, and our waters. That has been our consistent position from the start and I will not be changing it," without ruling out a possibly pending change of position by PM Johnson.