New Zealand Dollar Could Push GBP/NZD to November 2020 Low

• NZD/USD reversal of 2021 downtrend underway
• Attempted probe above 0.70 could be imminent 
• Puts GBP/NZD under pressure at multi-year lows 
• GBP/NZD could test 1.8700 or below short-term

Pine timber being exported from Wellington, New Zealand. Photo by James Anderson, World Resources Institute.

The Pound to New Zealand Dollar rate reached its lowest level since January 2021 in the mid-week session but would be at risk of falling further in at least the short-term if the Kiwi currency continues to reverse last year’s downtrend against the U.S. Dollar.

New Zealand’s Dollar rose broadly over the course of Tuesday and Wednesday when it was outperformed by only the European single currency in a rally against the U.S. Dollar, leading NZD/USD to further reverse a more-than year-long downtrend. 

“We see tactical upside in NZD/USD to .7085 and possibly the lows .72s. A head and shoulders bottom was recently confirmed,” says Paul Ciana, chief technical strategist at BofA Global Research. 

Ciana and colleagues flagged the tentative reversal of the Kiwi’s downtrend earlier in March and told BofA Global Research clients late last week that any decline in NZD/USD back to the 0.69 area would be viewed by them as a buying opportunity.

They say the outlook for NZD/USD is likely to remain favourable while it holds above 0.6800 following an early March completion of a “head and shoulders” reversal pattern on the charts, which indicates the Kiwi could rise as far as 0.72 in the near future. 

This is as much of a bearish development for GBP/NZD as it is a bullish one for NZD/USD in light of the often-negative correlation between the two.

Above: NZD/USD at daily intervals with Fibonacci retracements of November fall indicating various possible areas of technical resistance for the Kiwi, and shown alongside Pound to New Zealand Dollar rate. Click image for closer inspection.

GBP/NZD tends to always closely reflect the relative performance of Sterling and the Kiwi when each is measured against the U.S. Dollar and would be likely to fall close to the 1.87 handle if NZD/USD breaks above the 0.70 handle over the coming days.

That’s unless Sterling is able to stage a rally of its own in the meantime, which might be unlikely in the face of increased uncertainty about the outlook for the Bank of England (BoE) Bank Rate during the months ahead.

“We are watching very carefully but facing very high levels of uncertainty as to what is the right combination of what I said earlier was the ‘natural and quite substantial hit to real income’ - this terms of trade shock that we’re facing - and the right use of monetary policy,” Governor Andrew Bailey told the economic policy think-tank Bruegel this week.

“We recognise that the overall effect on inflation will be the sum of the two and I think the shock to real income is larger, and I think many commentators say this, than the single effect of monetary policy. But monetary policy is important. Not least because we have to guard against second round effects,” he also said.

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Governor Bailey clarified what was already alluded to in the BoE’s March policy statement this Monday when saying that the present commodity-induced squeeze on incomes could serve as a substitute for some of the additional increases in Bank Rate that markets have taken as given for later in 2022.

This has left market expectations for Bank Rate to rise from 0.75% to 2% by year-end appearing as if they may be on the excessive side of what is feasible for the coming months, and triggered losses in most Sterling exchange rates earlier in the week. 

“Not even an above consensus February CPI print was enough to lift GBP - quite the opposite in fact - given that markets are cognizant that the news flow in the coming months could (and probably will) alter the central bank reaction function. Both consensus and valuation signals are broadly in favour of a higher GBP,” says Kamal Sharma, a BofA Global Research colleague of Ciana, in reference to Sterling’s performance this month.

While the Pound has remained a laggard against other major currencies this week, the Kiwi Dollar has gone from strength to strength and had by Wednesday risen above its 55-week moving-average around 0.6969 against the U.S. Dollar.

Above: NZD/USD shown at weekly intervals with Fibonacci retracements of 2021 downtrend indicating various possible areas of medium-term technical resistance for the Kiwi. Click image for closer inspection.

“The NZD story is a good one, but having “gone early” with the recovery and rate hikes, it may not be as good as the AUD story,” says David Croy, a strategist at ANZ, who sees the Kiwi as likely to rise further against the U.S. Dollar in the weeks ahead.

The Kiwi Dollar’s outperformance has weighed heavily on GBP/NZD in recent trading and would be likely to push Sterling to its lowest level since November 2020 in the near future if NZD/USD does manage to break above the 0.70 handle over the coming days. 

“The commodity price trend remains upward - a powerful source of support for the NZD,” says Imre Speizer, head of NZ strategy at Westpac. 

“Longer term, we target 0.7100+ by June. The RBNZ clearly has more work to do to claw back inflation expectations, and NZ meat and dairy prices, in particular, have further upside,” Speizer and colleagues also said on Wednesday. 

While the side effects of recent gains in commodity prices have weighed heavily on Sterling, they could yet deliver a windfall to the Kiwi economy and Dollar, the latter of which has also benefited from Reserve Bank of Zealand (RBNZ) policy guidance.

The RBNZ suggested last month that it could soon lift Kiwi interest rates faster and in larger increments than financial markets have so-far given credit for as part of an effort to bring inflation back down to the two percent target over the coming years. 

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