Pound / New Zealand Dollar Rate Steadying but Risks Slide to 1.8634

• GBP/NZD steadier as commodity demand eases
• Could hold 1.91 if commodity FX demand fades
• But renewed bid, market volatility a risk to GBP
• GBP/NZD could hit 1.8634 in extreme scenario
• Buoyant NZD/USD limiting GBP/NZD at 1.9330
• Steeper RBNZ rate path also helping NZD/USD

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The Pound to New Zealand Dollar exchange rate steadied early in the new week as demand for commodity-linked currencies cooled, offering Sterling an opportunity to reestablish a footing above 1.91, although there remains a risk of further losses that could yet push GBP/NZD as far as 1.8634.

New Zealand’s Dollar has been a relative outperformer among major currencies since the February 24 invasion of Ukraine, which placed Pound Sterling under pressure alongside many other European currencies, leading to a steep and almost unbroken extension of GBP/NZD’s earlier decline.

GBP/NZD fell more than five percent between February 24 and Monday this week, adding further to a corrective decline that had been underway since the early days of February while making for a total -7.2% loss during that time, although the Sterling exchange rate was steadier on Tuesday.

“Global risk sentiment started the week deeply negative, before improving as European leaders indicated they would resist sanctions on Russian energy exports, preferring instead a determined strategy to reduce dependency on Russian imports. Markets remain very volatile, however, and are highly sensitive to quick shifts in tone,” says David Croy, a strategist at ANZ.

“The Kiwi is lower this morning, having dropped almost a cent from yesterday’s highs. While the move looks more corrective than “real” given what’s happening elsewhere (oil and commodity prices remain very elevated), the USD has benefited from the rebound in US bond yields off yesterday’s lows. Risk sentiment remains fragile, there is still plenty of water to flow under the proverbial bridge, and more volatility seems likely,” he also said Tuesday.

Above: Pound to New Zealand Dollar rate shown at daily intervals with Fibonacci retracements of November rally indicating possible areas of intermittent technical support for Sterling.

• GBP/NZD reference rates at publication:
  Spot: 1.9200
• High street bank rates (indicative band): 1.8530-1.8660
• Payment specialist rates (indicative band): 1.9230-1.9105
• Find out about specialist rates, here
• Set up an exchange rate alert, here

New Zealand’s Dollar is, among other things, a commodity-linked currency of the agricultural variety and may have benefited from the Russian invasion of Ukraine given the occupied country is among the largest producers of certain agricultural goods globally.

However, it’s also relevant that steep intervening increases in other commodity prices including gas and oil will be highly inflationary for all economies, which likely has implications for a Reserve Bank of New Zealand (RBNZ) interest rate policy that was already supportive of the Kiwi Dollar.

“We have revised our Official Cash Rate (OCR) call and are now forecasting back-to-back 50bp hikes in both April and May. We now see the OCR reaching a peak of 3.5% in April 2023 (3% previously),” writes Sharon Zollner, chief economist at ANZ, in a Tuesday research briefing.

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“Oil is the biggie, with crude futures soaring to nearly USD140at one point this week, rather than starting a journey back to USD80 as the RBNZ assumed back in February,” Zollner and colleagues also said.

The RBNZ announced significant upgrades to its forecasts for inflation in February as well as to its assumption of the level that interest rates will need to rise to in order to bring price pressures under control over the coming years.

But one problem for Sterling is the RBNZ’s upgraded forecasts were based on oil prices that were much lower than those prevailing on Tuesday and the inflationary implication of this is that policymakers could now feel minded to accelerate the pace at which they raise interest rates in the months ahead.

Above: NZD/USD shown at daily intervals with Fibonacci retracements of November decline indicating likely areas of technical resistance for the Kiwi, while selected moving-averages denoted prospective support and resistance levels.

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“Markets will be interested in any shift in RBNZ stance (in either direction) resulting from this global commodity price surge,” says Imre Speizer, head of NZ strategy at Westpac, in a Tuesday note.

“The upside remains vulnerable, with potential for a move above 0.6925 multi-day as commodities continue to surge,” Speizer and colleagues also said in reference in NZD/USD.

The prospect of an accelerated pace of rate rises from the RBNZ is a bullish factor for the Kiwi Dollar that is buttressed by rising commodity prices as well as scope for an uptick in demand for New Zealand’s agricultural commodities, all of which are potentially bearish for GBP/NZD.

This, the UK’s relatively closer proximity to the conflict in Ukraine and its role in the sanctions response are all likely drivers of the recent divergence between NZD/USD and GBP/USD, which has contributed significantly to the extremely bearish price action seen in GBP/NZD of late.

Should that divergence renew then it could potentially push the Pound to New Zealand Dollar rate as low as 1.8634 during the weeks ahead, although any prolongation of the calmer market conditions prevailing on Tuesday could potentially enable GBP/NZD to stabilise above the 1.91 handle.

The Pound to New Zealand Dollar rate tends to closely reflect the relative performances of NZD/USD and its Sterling equivalent GBP/USD.

Above: NZD/USD shown at daily intervals alongside GBP/USD.