Pound-New Zealand Dollar Rate Unravels into New Lower Range as Kiwi Stages Comeback

- GBP/NZD unravelling into lower 1.9480-1.9765 range
- NZD/USD break higher brings 3-month lows into view
- NZ prepares to ease restrictions after short shutdown
- Keeps RBNZ on track for lift-off as Fed et al bide time

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• GBP/NZD reference rates at publication:
• Spot: 1.9500
• Bank transfers (indicative guide): 1.8818-1.8954
• Money transfer specialist rates (indicative): 1.9325-1.9364
• More information on securing specialist rates, here
• Set up an exchange rate alert, here

The Pound-to-New Zealand Dollar rate was unravelling toward three-month lows that mark the likely bottom of a new and reduced trading range at the opening of a holiday-shortened week, as New Zealand prepared to begin exiting its latest ‘lockdown’ in what is a significant development for the Kiwi.

New Zealand’s Dollar was the outperformer among major currencies on Tuesday at the opening of a holiday-shortened week for the UK, host to the global foreign exchange trading hub that is London, with NZD/USD scoring by far the largest gain over a retreating U.S. Dollar.

U.S. Dollar declines lifted all currencies but NZD/USD was outperforming even the most buoyant as well as typically more volatile emerging market currencies as much of New Zealand prepared for an easing of the latest coronavirus-inspired restrictions.

“Level 3 for the country south of Auckland will remain in place for a week, and we’ll review these settings at Cabinet on 6 September. Our hope will, of course, be that we can keep lowering restrictions when it is safe to do so,” says Prime Minister Jacinda Ardern, in a Monday press conference. “Auckland will remain at alert level 4 for another two weeks. Cabinet will meet again on Monday, 13 September to look at our next steps for Auckland.”

With the exception of Auckland all of New Zealand exits ‘lockdown’ this Tuesday when shifting down to Alert Level 3, marking the beginning of a gradual reopening process after barely a fortnight under lock and key following the detection of a singular coronavirus infection on August 17, which may be why the Kiwi overlooked data showing business confidence tumbling in August and was unmoved by similarly gloomy surveys from trade partner China.

Above: GBP/NZD at daily intervals with Fibonacci retracements of 2021 uptrend indicating possible areas of support, and NZD/GBP.

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“NZD/GBP has broken out of its downtrend; price action is more positive. But resistance at 0.51 [GBP/NZD: 1.9607] is proving hard to break through. It needs to break >0.51 so as not to squander the opportunity provided by the bounce,” says David Croy, a strategist at ANZ.

While the economy will remain subject to many stifling restrictions for a number of weeks at least, the tentative effort to reopen signals that New Zealand’s latest run-in with the coronavirus could be shorter-lived than Australia’s and may have helped to dispel any doubts in the market about whether the Reserve Bank of New Zealand (RBNZ) will be able to go ahead with a widely perceived plan to begin lifting interest rates by year-end.

“While the OCR was unchanged in August, the RBNZ has made it clear that a hike was planned. There’s a lot that has to go right for the RBNZ to be able to hike the OCR as they plan – but barring some unforeseeable catastrophe, we expect those hikes will commence in October,” says ANZ’s Croy.

The RBNZ made clear in August’s policy decision and in subsequent media engagements that an initial increase in the cash rate from 0.25% to 0.50% had been delayed rather than derailed by the latest outbreak, although Australia’s experience amid its current outbreak and the resulting doubts about the outlook for Reserve Bank of Australia (RBA) policy had seen the market adopting a cautious approach toward the Kiwi nonetheless.

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But with restrictions on activity easing the market can now readily envisage the RBNZ beginning to raise rates later this year, in a process that could ultimately lift New Zealand’s benchmark interest rate from 0.25% presently to a little more than 2% over the coming years, in what is a significant boon for the main Kiwi exchange rate NZD/USD and a bearish development for the Pound-New Zealand Dollar rate.

“NZD/USD has potential to extend to the range high around 0.7075, in a cautiously bullish near term outlook,” says Imre Speizer, head of NZ strategy at Westpac. “Longer term, though, yield spreads should again become a strong upward influence, with the RBNZ determined to proceed with a tightening cycle. We continue to target 0.74 by year end.”

Pricing in the overnight-index-swap market indicated on Tuesday that investors see roughly an 88% probability of an October interest rate rise from the RBNZ, and a similar probability of another rate rise the next month in November.

The RBNZ outlook is all the more notable for the Kiwi following the latest from Federal Reserve Chairman Jerome Powell, who confirmed last Friday that the Fed is likely to begin winding down its quantitative easing programme before year-end but otherwise ruffled the U.S. Dollar’s feathers when saying the economy will have to pass “a different and substantially more stringent test” before the bank would be willing to lift its own interest rates.

Above: NZD/USD shown at daily intervals with Fibonacci retracements of March fall and major moving-averages indicating possible areas of resistance, shown alongside GBP/USD.

That test involves reemployment of the remaining six million American workers idled by the coronavirus last year and likely means the Dollar will be highly sensitive to the outcome of this Friday’s non-farm payrolls report in the U.S., although irrespective of the outcome here New Zealand’s steps out of lockdown and the implications for RBNZ policy could potentially provide ongoing support to the Kiwi and act as a headwind for GBP/NZD.

“Recent RBNZ commentary regarding OCR tightening, notably from Assistant Governor Hawkesby who allowed for a 50bp hike to start the cycle, has lifted yields across the curve. Markets have shifted pricing for a hike in October, from 50% last week to 90% currently. If delta cases do not accelerate, pricing could soon reflect some chance of a 50bp move,” says Damien McColough, head of rates strategy at Westpac.

The Pound-to-New Zealand Dollar rate always closely reflects the relative performance of NZD/USD and GBP/USD, and would test an important level of technical support located around 1.9480 this week if NZD/USD makes it as far as the 0.7075 level tipped by Westpac’s Speizer and if at the same time, the main Sterling pair GBP/USD is unable to overcome the 1.38 threshold that had blocked its path higher early in the new week.

GBP/NZD would however, rise as far as 1.9765 in the event that U.S. economic data or any other factor stokes a rebound in the U.S. Dollar that pushes both GBP/USD and NZD/USD back toward last week’s respective lows, indicating that 1.9480-to-1.9765 could mark the loose confines of Pound-to-New Zealand Dollar rate’s likely short-term trading range.

There are no major economic figures due from either New Zealand or the UK this week, which leaves currency market attention focused on a busy U.S. economic calendar and the potential implications for the Fed as well as U.S. Dollar.

Above: GBP/NZD at weekly intervals with major moving-averages and Fibonacci retracements of 2021 uptrend indicating possible areas of support, alongside NZD/GBP.