Rejected Pound-New Zealand Dollar Beats a Retreat

- NZD tipped to rise over coming days
- GBP/NZD fails to overcome resistance
- RBNZ cannot ignore house prices forever

Image © Adobe Stock

• GBP/NZD reference rates at publication:
• Spot: 1.9595
• Bank transfers (indicative guide): 1.8909-1.9046
• Money transfer specialist rates (indicative): 1.9420-1.9458
• More information on securing specialist rates, here
• Set up an exchange rate alert, here

The New Zealand Dollar is tipped to find itself better supported over the course of the coming week as buyers return to the currency in anticipation of higher interest rates at the Reserve Bank of New Zealand (RBNZ).

Signs of resurgent demand for the Kiwi are reflected in the Pound-to-New Zealand Dollar exchange rate (GBP/NZD) which has fallen back from a key resistance level and looks on course to register a second daily decline.

The pair is at 1.96 at the time of publication.

The Pound advanced against the New Zealand Dollar in the previous week but buyers were rejected in the vicinity of 1.9778, as can be seen in the below chart buying interest has a habit of capitulating here:

Above: GBP/NZD daily chart. 

Secure a retail exchange rate that is between 3-5% stronger than offered by leading banks, learn more.

The chart suggests a notable impulse of buying interest in the Pound, or a sharp deterioration in New Zealand Dollar sentiment, is required for a break to the upside to occur.

Given the sparse UK calendar and the ongoing concerns posed by rises in Covid-19 infections in the UK, the Pound is unlikely to deliver any upside surprises over coming days.

If anything, the bias is pointed lower with one analyst we follow saying demand for the New Zealand Dollar could be expected to be a feature of coming days and weeks.

"With a broadly unchanged and supportive fundamental picture for NZD, we see room for a recovery in the coming weeks, as markets should continue to see with favour the improved rate profile after the shift in tone by the Reserve Bank of New Zealand," says Chris Turner, Global Head of Markets and Regional Head of Research for UK & CEE at ING Bank.

Pound Sterling Live reported last week that a number of institutional analysts had upgraded their New Zealand Dollar forecast profiles in the wake of the May policy meeting of the RBNZ.

"We upgrade our forecast for the New Zealand dollar," says Georgette Boele, Senior Currency Strategist with ABN AMRO, the Dutch headquartered international investment bank and financial services provider.

The RBNZ gave guidance at their May policy decision and Monetary Policy Statement that ultimately saw expectations for an interest rate rise move forward, with markets now expecting the first rate rise will come in 2022.

"The RBNZ also published its projections for the OCR. This showed that the OCR is likely to increase in the second half of 2022. This spurred rate hike expectations and supported the New Zealand dollar," says Boele in a research note.

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

ING's Turner says the expectation for higher interest rates at the RBZN informs his team's expectations for a well supported New Zealand Dollar, particularly given house prices in New Zealand remain elevated.

"Housing data for May indicated that the government measures have not been very successful in curbing the rise in prices, which keeps suggesting RBNZ tightening is warranted. We’ll get more housing figures in the week ahead, but the calendar in NZ is pretty quiet otherwise," adds Turner.

The New Zealand Dollar dropped against all its peers on March 23 after the government announced a series of measures to cool the housing market, which investors believed would relieve pressure on the RBNZ to raise rates to deal with a festering issue facing the country.

A central bank can ease housing market pressures by raising interest rates, which in turn raises the cost of financing which pushes up mortgage rates and lowers housing demand.

Lower demand means lower house prices.

A side effect of higher interest rates is a stronger currency as international capital will flow into New Zealand seeking out higher returns, which is a positive outcome for those in the market seeking a stronger NZ Dollar.

But, raising rates also risks slowing the broader economy down.

To avoid such a scenario the New Zealand government announced plans which 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.

But, a few months on and it appears the efforts to cool the market have not made an obvious impact.

The average price nationwide was up 2.2% to $890,848 in May, even if the rate of increase was down from the 3.1% in April, according to CoreLogic’s House Price Index.

House prices gained 20.5% in the year to May, up from 18.4% in the year to April.

ING's view is that the RBNZ will ultimately be required to consider the housing market in its decisions over coming months, and this could in turn prompt a lean towards higher interest rates and fuel a bullish NZ Dollar outlook.

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