Pound-New Zealand Dollar Rate Could Fall Another 7% on No Deal

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• GBP/NZD spot rate at time of publication: 1.8657
• Bank transfer rate (indicative guide): 1.8009-1.8139
• FX specialist providers (indicative guide): 1.8382-1.8531
• More information on FX specialist rates here

The Pound-to-New Zealand Dollar rate fell to its lowest since August 2019 on Friday even as the Kiwi cooled its heels after another strong weekly gain, but it could fall a further seven percent and to its lowest since January 2017 if Britain and the EU fail to reach a trade agreement this month.  

Sterling was the worst performing major currency again having sustained heavy losses against all major counterparts after Prime Minister Boris Johnson and European Commission chief Ursula Von Der Leyen warned overnight that a 'no deal' Brexit from the transition period is now likely after year-end.

It received only a short-lived boost when remarks by Germany's foreign minister Heiko Maas were taken out of context by investors. Maas was quoted saying made from Brussels that "the talks will not fail because a few days more are needed," although he was also reported to have said that continuing the talks could only be justified if there were signs of an agreement.

Both sides agreed this week that any agreement ideally needs to be struck before a new Sunday 'deadline'. 

Sterling's main exchange rate GBP/USD was pricing-in something like a greatly reduced 50/50 probability of a deal being struck when trading near to 1.31 on Friday, but could fall to 1.25 or below if the talks fail, analyst forecasts suggest. This has significant potential implications for the Pound-to-New Zealand Dollar rate, which always closely reflects relative price action in GBP/USD and NZD/USD, and more so because of recent strength of the Kiwi. 

"NZDUSD has reversed sharply higher to pressure back against the crucial .78.6% retracement of the 2017/2020 fall at .7111," says David Sneddon, head of technical analysis at Credit Suisse, who says the Kiwi could eventually reach 0.72 in the coming weeks. "We keep our bias for further consolidation at first, but stay alert for a clear break higher in due course." 

The Pound-to-New Zealand Dollar rate fell to a low of 1.8520 on Friday but with the NZD/USD rate trading around 0.71, Sterling would be liable for a fall to 1.8491 in the event that GBP/USD retreats to its nearest technical support level at 1.3129. But in a 'no deal' Brexit scenario where GBP/USD fell to 1.25, GBP/NZD would face a three-year low of 1.7605 if NZD/USD remained around 0.71 and 1.73 if NZD/USD climbs further to 0.72 in the weeks ahead.

Downside potential is being made all the greater because of robust investor appetite for commodity currencies and New Zealand's economic outperformance. 

Above: Pound-to-New Zealand Dollar rate shown at weekly intervals with NZD/USD (black line).

Kiwi Land's economic recovery continued in November, figures from the national treasury indicated on Friday, with the New Zealand Activity Index having risen again. The index was 1.6% higher last month than at the same time one year before, an achievement made all the more notable by a continued closure of the tourism industry, which is normally worth more than five percent of GDP. 

"Most constituent indicators are above 2019 levels such as traffic movements and electronic card transactions. The number of people receiving income support in November continued to decline from August but is still high compared to November 2019 (Jobseeker plus the COVID-19 Income Relief Payment)," treasury said in its weekly economic update. "Retail spending remained steady in November, although there are some signs that the momentum in spending may be waning. Building activity rebounded strongly in the September quarter, along with manufacturing and wholesaling activity, although service industries remain below last years' levels as a result of border restrictions."

This economic strength has been a source of additional downward pressure on the Pound-to-New Zealand Dollar rate, coming on top of the seemingly deteriorating prospect of a Brexit trade deal, which is set to remain the predominant influence for Sterling in the week ahead.

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GBP/NZD losses could be magnified or its recovery curtailed if analysts and economists at ANZ are right in expecting New Zealand's third-quarter GDP number to surprise on the upside next Thursday. 

Consensus, or the average of economist projections, is looking for New Zealand's GDP to have risen at a quarter-on-quarter pace of 12.8% for the three months to the end of September.

The data is due out at 21:45 London time next Thursday and could be a source of additional Kiwi Dollar gains if the ANZ team is on the money.  

"Q3 GDP is expected to rebound 14% q/q – a healthy rise relative to our previous expectations. While this may be the bringing forward of growth from Q4 to Q3, the recent run of better data has taken New Zealand’s growth profile modestly higher," says Daniel Been, head of FX research at ANZ. "Like the AUD, the NZD has responded strongly to the bounce in risk sentiment after the US election. Domestically, there is still room for improvement."

Above: Pound-to-New Zealand Dollar rate shown at weekly intervals with GBP/USD (black line).