Pound-New Zealand Dollar Exchange Rate Hits New 6-Month High, But Beware NZD Comeback says One Analyst

- GBP/NZD presses higher to new multi-month highs
- But ING says NZD downtrend lacks legs
- UBS lower NZD forecast target

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• GBP/NZD spot rate at time of writing: 1.9759
• Bank transfer rate (indicative guide): 1.9060-1.9160
• FX specialist providers (indicative guide): 1.9200-1.9300
• More information on FX specialist rates, here
• Set an exchange rate alert, here

Pound Sterling is firmly on course to record its fourth consecutive monthly gain against the New Zealand Dollar as a fresh bout of interest in the UK currency dominates foreign exchange trade action at the start of the new week, meanwhile investors continue to shy away from the Kiwi as they digest recent housing market policy changes.

The British Pound rose against the majority of its peers ahead of the flip into a new month and new quarter, with analysts saying a positive repricing of the currency in the wake of last December's EU-UK trade deal and a rapid vaccine rollout are combining to aid gains.

"Sterling has benefited from the UK’s strong vaccination rollout relative to its peers this year, boosting recovery hopes and demand for UK assets," says George Vessey, a foreign exchange strategist with Western Union Business Solutions.

The Pound-to-New Zealand Dollar exchange rate (GBP/NZD) rose to a fresh six-month high at 1.9823 on Monday as traders start to turn their gaze on the psychologically significant 2.00 mark, which was last traded back in August 2020.

Sentiment towards the New Zealand Dollar has meanwhile turned negative after the New Zealand government last week announced a series of measures to cool the housing market, include phasing out tax relief on interest payments and extending the bright-line test which effectively brings more existing homes into scope for capital gains tax.

The market's takeaway is the moves reduce the pressure on the Reserve Bank of New Zealand (RBNZ) to raise rates in the medium-term, thereby denying the New Zealand Dollar the support the country's relatively high interest rates traditionally confer.

Above: Expectations for higher interest rates in NZ have fallen in wake of recent property market developments.

"The New Zealand government surprised markets with an announcement that property investors will no longer be able to deduct mortgage interest from their taxable income—a game changer, in our view," says Wayne Gordon, a Strategist at UBS.

Economists at local lender Westpac have warned that the changes mean New Zealand house prices could settle around 10% lower over the long term.

Westpac warn that there will be potentially negative and unintended consequences for the economy, as lower house prices will have knock-on effects for activity, spending and inflation.

UBS say the housing market moves and expectations for weaker growth in the first quarter of 2021 increase the chance of an interest rate cut at the RBNZ.

"We have downgraded our NZDUSD forecasts, as we expect the NZD to underperform the GBP and the EUR," says Gordon.

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However foreign exchange analysts at ING Bank N.V. say they now believe the New Zealand Dollar to be undervalued, particularly relative to the U.S. Dollar.

Analysis of New Zealand's economic performance leads ING to the view the RBNZ has little reason to cut interest rates.

They say the economy has avoided the sizeable Covid shocks that other developed economies have suffered, meanwhile inflation and employment have showed encouraging signs of resilience.

Fourth quarter inflation read at 1.4% year-on-year, which not too far from the 2% central bank target.

"What counts in an FX perspective is that the risk of cuts by the RBNZ is extremely low, and markets will most likely not attempt to price in an OCR below the current 0.25%, which means the negative impact on NZD of the rate expectation re-pricing has likely worn off," says Francesco Pesole, FX Strategist at ING Bank.

However, Pesole says the currency could yet experience some near-term pressures as global conditions are take into account.

"Given the highly positive beta of NZD (and the negative beta of USD) to global risk appetite, the near-term outlook for NZD/USD remains strictly dependent on external factors. Even if risk appetite remains choppy in the next weeks (possibly on the back of third virus wave concerns, especially in Europe), we think that NZD should experience more limited downside pressure than other pro-cyclical currencies," he says.

However, NZD/USD is forecast by ING to recover and move above the 0.75 mark in the second half of the year.

Should NZD/USD rise - as per this expectation - faster than GBP/USD rises, then GBP/NZD would likely decline on a cross-currency basis.