Why Pound-New Zealand Dollar Could Strengthen Over Next Two Weeks

- Barclays look for NZD weakness
- Cite caution ahead of Feb. RBNZ meeting
- But global recovery to provide support for NZD

Above: File image of RBNZ Governor Adrian Orr at a press conference. Image courtesy of RBNZ.

Foreign exchange analysts at Barclays say the New Zealand Dollar could weaken over the next two weeks as investors adopt a cautious stance ahead of the Reserve Bank of New Zealand (RBNZ) policy meeting, due on February 24.

Any weakness in the broad New Zealand Dollar could in turn help the Pound to resume the short-term trend of recovery that snapped a medium-term losing streak at the start of 2021.

"We think the NZD is likely to weaken in the run-up to its MPC meeting on 24 February," says Ashish Agrawal at Barclays.

The Pound-to-New Zealand Dollar exchange rate recovered from 1.8629 to reach 1.9200 during January's rally, but the move has since stalled and the pair is now seen back at 1.9060 at the time of writing with little clear directional trend evident.

The stalling of the recovery will aid suspicions that the broader, longer-term, decline that has been in place since since August is about to resume following a short hiatus.

• GBP/NZD spot rate at publication: 1.9058
• Bank transfer rates (indicative guide): 1.8391-1.8524
• FX transfer specialist rates (indicative): 1.8468-1.8900
• More information on acquiring specialist rates, here

But, should the view held at Barclays prove correct, then Sterling bulls will hope the trend of appreciation seen in January is more sustainable and represents a bottom for GBP/NZD.

"The NZD has likely overshot after it rallied 5% since the November MPC on improving domestic data and higher rates in New Zealand," says Agrawal.

Investors have dumped New Zealand bonds over recent months as they came around to the view that the RBNZ would not cut interest rates in early 2021, as had been an assumption through the first half of 2020, leading to a rise in the yield paid on those bonds.

These rising bond yields have in turn attracted inflows of foreign capital as investors seek out better returns, which in turn supports NZ Dollar appreciation.

Above: GBP/NZD has trended lower as markets erased expectations for another RBNZ rate cut.

However, the current trend of a rising New Zealand Dollar and rising bond yields might not be welcomed by the RBNZ and some analysts are wary that Governor Adrian Orr and his team will try and push back against recent trends later this month.

"We think the sell-off in rates is overdone but acknowledge markets' erasing easing expectations. We think the RBNZ is unlikely to sound 'neutral' and more likely to lean against market expectations, especially as the RBA and Fed continue with bond purchases. We note risks of RBNZ comments on NZD strength, as the RBNZ's TWI is at 74.9 currently, well above the RBNZ's projection of 71.5 in the November forecast," says Agrawal.

But it won't just be expectations for RBNZ policy that are likely to impact the Kiwi currency, which traditionally has a strong correlation with global stock markets and commodity prices.

The currency tends to appreciate alongside rising markets as this small, open economy with strong trade links with Asia tends to outperform when the global economy is in an upswing.

Therefore, broader investor sentiment will be important over coming days and weeks.

"The NZD has softened somewhat following a pullback in risk sentiment. Looking forward, while the domestic data has remained strong, the mix of fewer tourist arrivals and a relatively dovish central bank will continue to somewhat offset the boost from broadening cyclical growth," says Daniel Been, Head of G3 & FX Research at ANZ.

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

A broadly firm start to the week for global equity and commodity markets on February 08 has corresponded with a firmer New Zealand Dollar, which is up slightly against the Pound, Euro and U.S. Dollar.

"The risk-on mood seems to be driven by a combination of falling case numbers in developed countries, whilst efforts by Congressional Democrats to pass Joe Biden’s $1.9TRN stimulus without Republican support has delivered a fresh shot of confidence into equity markets," says Neil Wilson, Chief Market Analyst at Markets.com.

Foreign exchange strategists at Crédit Agricole are meanwhile backing the New Zealand Dollar to remain an outperformer, thanks to its exposure to the global economic recovery as well as the domestic economy's resilience during the covid crisis.

"NZ’s strong performance in containing Covid-19, its aggressive fiscal stimulus and exposure to the relatively stronger economic recoveries in Asia and Australia will continue to see the NZD outperform. Soaring house prices also constrain the RBNZ’s ability to ease policy further," says Valentin Marinov, Head of G10 FX Strategy at Crédit Agricole.

However, upside strength in the currencywill be tempered by the observation the economy will never regain its full potential until international borders are opened fully once more.

"NZ’s heavy reliance on tourism and education exports and the closure of international borders will be the only check on the stronger NZD," says Valentin Marinov, Head of G10 FX Strategy at Crédit Agricole.