Pound-New Zealand Dollar Rate Support Emerging at 1.94, but Limited Upside Prospects

Modified: Thursday, 16 September 2021 15:25 BST
Written by: James Skinner

- GBP/NZD supported at 1.94 but struggles above 1.95
- May fall to 1.9060 or below if NZD/USD breaks higher
- NZD/USD in range trade ahead of Oct RBNZ decision
- Coronavirus developments key to NZD/USD outlook

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GBP/NZD reference rates at publication:
Spot: 1.9484
Bank transfers (indicative guide): 1.8800-1.8940
Money transfer specialist rates (indicative): 1.9310-1.9390
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The Pound-New Zealand Dollar rate found support around 1.94 in the penultimate session of the week and could be set to remain above that level for a while yet, although the Kiwi’s ongoing resilience leaves Sterling with little if any scope to rise meaningfully.

The Pound-New Zealand Dollar rate found support around 1.94 in the penultimate session of the week and could be set to remain above that level for a while yet, although the Kiwi’s recent strength and ongoing resilience leaves Sterling with little if any scope to rise meaningfully.

A strengthening U.S. Dollar saw the Kiwi trailing advanced economy counterparts and helped lift the Pound-to-New Zealand Dollar rate off session lows near 1.94 on Thursday although this Sterling pair could struggle for traction once above the nearby 1.95 handle in the coming weeks.

This is due to strength and resilience of the Kiwi that is rooted in the outlook for interest rates at the Reserve Bank of New Zealand (RBNZ), which said in August that it will push ahead with a plan to lift the country’s main interest rate from near zero currently to a little over 2% by 2024.

The RBNZ’s plan is a response to rising inflation rates and is intended to prevent annual inflation inflation rates from becoming entrenched above the upper end of the bank’s one-to-three percent target range in the coming years.

If anything it became more likely on Thursday that the RBNZ would continue with this plan after official data revealed that New Zealand’s economy was growing faster than all observers had anticipated before its third quarter ‘lockdown,’ and at twice the level of the RBNZ’s quarterly forecast of 0.7%.

“New Zealand’s Q2 GDP was 4.3% above pre-COVID (Q4-2019) levels. With revisions to the historical data, it appears economic activity had already returned to above pre-COVID levels in Q3-2020,” says Jonathan Koh, an economist at Standard Chartered.

Above: Pound-to-New Zealand Dollar rate shown at daily intervals.

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Statistics New Zealand figures also revealed that economic growth was faster in 2020 than its own earlier estimates had suggested when announcing upward revisions to some of last year’s figures that effectively added a full percentage point to annual GDP.

“Assuming restrictions are relaxed further, we expect growth momentum to pick up again in Q4 to bring full-year 2021 GDP growth to 5.5%. We expect the RBNZ to stick to its path of monetary policy normalisation,” Koh adds.

Koh and the Standard Chartered team are looking for the RBNZ to raise its cash rate from 0.25% to 0.5% in October, and also tip another rate rise to 0.75% for the November meeting, which is in line with what financial markets are pricing-in.

“The OIS rate associated with the October 6th RBNZ meeting rose to 0.61% now from 52bps yesterday. With the RBNZ at 25bps presently, this suggests that the money market is increasingly thinking that the RBNZ's liftoff rate hike will be 50bps rather than 25,” says Stephen Gallo, European head of FX strategy at BMO Capital Markets.

The overnight-index-swap market has quickly priced-in exactly the cycle of rate rises the RBNZ is anticipating and then some on top, which has been supportive of the Kiwi and a burden for a Pound-New Zealand Dollar rate that fell from above 2.00 in August, to a low of 1.9250 in early September.

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GBP/NZD has recovered as the Kiwi’s rally faded in September and has since found good support at 1.94, with intraday losses down to that level eliciting a market bid twice in the week to Thursday, although the outlook for GBP/NZD is hinged heavily on coronavirus developments in New Zealand.

Since August’s latest ‘lockdown’ much of the country has seen restrictions eased markedly, with only the metropolis of Auckland remaining in shut-in mode, although future developments and their impact on NZD/USD will be instrumental in determining if GBP/NZD can hold above 1.94 going forward.

“The RBNZ has indicated that it will shrug off the latest lockdown and will press ahead with hiking rates in October,” says Ben Udy, an Australia and New Zealand economist at Capital Economics. “We still assume that the more contagious Delta variant will prove too difficult to control to allow a marked easing of restrictions over the coming weeks and expect the Bank to delay the first rate hike until next year.”

Should local coronavirus developments lead the RBNZ to defer October’s anticipated rate rise, as is expected by Capital Economics, then NZD/USD could come under pressure and this would almost inevitably lead the Pound-to-New Zealand Dollar rate to rise.

On the downside for Sterling, the main Kiwi exchange rate NZD/USD would likely need to rise above its early September high at 0.7171 in order to push GBP/NZD below 1.94 on the interbank market and so far in September NZD/USD has shown little inclination to do so.

Above: NZD/USD at daily intervals with 100 and 200-day moving-averages and shown alongside GBP/USD.

“The “delay not derail” theme has underpinned expectations that the RBNZ will lift the OCR next month, and that has in turn lent support to the NZD,” says David Croy, a strategist at ANZ. “ANZ is forecasting the RBNZ to lift the OCR steadily, but a lot has to go right, even if historic data shows that the economy was on very solid ground going into the August/September lockdown.”

NZD/USD has spent the month trading between its 100 and 200-day averages at 0.7074 and 0.7117 respectively on a daily closing basis, leaving the early September high of 0.7171 appearing to be a distant prospect, although some analysts say a rise above this level would indicate to the market that further gains are in the pipeline for the Kiwi.

“NZD/USD may have completed its two-week old correction at 0.7075. If so, we will watch for a range break above 0.7170, which would signal a move beyond 0.7300,” says Imre Speizer, head of NZ strategy at Westpac.

“The level of GDP as at the end of June is much higher than was previously thought, with obvious implications for capacity pressures and therefore monetary policy,” Speizer writes in a Thursday research note.

The Pound-to-New Zealand Dollar rate would fall at least as far as 1.9060 if not below, from above 1.9470 on Thursday, in any market where the main Kiwi exchange rate is quoted at 0.73 unless at the same time the main Sterling pair GBP/USD can overcome its recent high around 1.3913.

GBP/NZD always closely reflects the relative performance of GBP/USD and NZD/USD.

Above: NZD/USD shown at daily intervals and annotated by ANZ Research for major milestones in 2021 price action for the Kiwi.