Pound-New Zealand Dollar Week Ahead Forecast: Abandoning 'Zero Covid' Unlikely to Derail RBNZ, Yet

- GBP/NZD holds range
- NZD to raise rates 25 basis points
- NZ abandons 'zero covid' approach
- Barclays annoint NZD their Trade of the Week

• GBP/NZD reference rates at publication:
• Spot: 1.9499
• Bank transfers (indicative guide): 1.8817-1.8953
• Money transfer specialist rates (indicative): 1.9324-1.9400
• More information on securing specialist rates, here
• Set up an exchange rate alert, here

The Reserve Bank of New Zealand (RBNZ) is tipped to raise interest rates on Wednesday, but the New Zealand Dollar will need a constructive message from policy makers regarding the outlook if it is to push higher.

The New Zealand Dollar has advanced against the Pound and other major currencies since August, helped by a hardening expectation the central bank would raise interest rates at the October 06 policy meeting.

An interest rate hike is well priced into the New Zealand Dollar by now and the risk is that the outcome of the RBNZ disappoints buyers, particularly if the RBNZ reflects on the New Zealand government's decision to abandon its 'zero covid' approach.

The Pound-to-New Zealand exchange rate has fallen back from a 2021 high at 2.00 to trade back at 1.9493 where a basing pattern appears to be establishing:

Above: GBP/NZD daily showing key levels.

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The price action is consistent with analysis issued last week from ANZ that expected the pair to maintain a range between 1.9320 at the bottom and 1.9600 at the top; the assessment was correct and looks relevant to another week.

The near-term compression in the exchange rate could find a release valve depending on what Governor Adrian Orr signals mid-week about the prospect of future rate hikes mid-week: if his assessment is optimistic on the outlook and that more rates are therefore needed the NZ Dollar can advance.

"In New Zealand, we expect the RBNZ to lift rates by 25 basis points and signal more to come in the coming months," says Gaétan Peroux, Strategist at UBS AG.

Peroux says the most recent spike in COVID-19 cases has subdued market pricing for the upcoming meeting after the lockdown thwarted the RBNZ’s plans in August.

"But solid business conditions data, swiftly rising house prices and broadening consumer price pressures likely override the COVID-19 risks at this stage, particularly as the economy is expected to rebound sharply when restrictions ease further," he adds.

Foreign exchange analysts at Barclays expect this week's hike to be followed by 25bp hikes at the next two meetings.

A hiking path is already priced in market curves, "but should nevertheless boost the NZD," says strategist Ashish Agrawala in a regular weekly strategy note from Barclays.

Barclays have recommended buying the New Zealand Dollar as their "Trade of the Week" in anticipation of the rate hike and see gains coming against both the U.S. Dollar and Australian Dollar.

"We expect NZD underperformance to reverse, especially if the RBNZ hikes 25bp and guides for back-to-back hikes," says Agrawal.

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If Orr and the board strikes caution and seeks to contain rate expectations the NZ Dollar could react by going lower.

"Investors may adjust expectations after the RBNZ meeting towards less aggressive tightening," says Roberto Mialich, FX Strategist at UniCredit.

"With the virus now contained, I think they will go ahead with a modest 25 bps rate hike. I think this is probably the market consensus and so shouldn’t have that much impact on NZD, although it could boost it a little," says Marshall Gittler, Head of Investment Research at BDSwiss Group.

A potential complication to Gittler's view is the news out of New Zealand on Monday that the country has effectively abandoned its 'zero covid' approach, an admission that the virus is in fact not contained.

Authorities recognise that the Delta variant has made the task all but unachievable.

"With this outbreak and Delta the return to zero is incredibly difficult," Prime Minister Jacinda Ardern said.

In response, authorities will commence the easing of restrictions in Auckland this week although a full lifting of restrictions will only be allowed when 90% of the population has been fully vaccinated.

"This is a change in approach we were always going to make over time. Our Delta outbreak has accelerated this transition. Vaccines will support it," said Ardern.

The new approach carries risks in that: 1) there is negligible prior exposure in the population and therefore a substantial pool of the population that can still catch the virus, and 2) less than half the population are fully vaccinated.

If cases explode the government might reconsider the easing condemning the country to an extended period of economically draining lockdown conditions.

The Covid situation in the country is therefore at a precarious point and the RBNZ's tone might well reflect this via a message of caution on the outlook.