GBP/NZD Rate in Losing Battle with Kiwi’s Yield Appeal

• GBP/NZD facing period of suppression below 1.94
• With high yield appeal & a softer USD aiding Kiwi 
• Range of 1.9182 to 1.9385 possible in short-term 

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

The Pound to New Zealand Dollar exchange rate has given up the 1.94 handle amid an upswing in demand for riskier currencies, which leaves Sterling vulnerable to the Kiwi’s high yield appeal and may mean that a period of suppression within a rough 1.9182 to 1.9385 is likely ahead for GBP/NZD.

Sterling was a middle of the road performer on Tuesday while its antipodean counterparts like the New Zealand and Australian Dollars were outperformers alongside many others in Europe following further declines by the U.S. Dollar and an upswing in demand for risk assets.

“AUD and NZD have outperformed the euro, which suggests this is more of a USD move than a EUR move, although EURUSD's 1.1% bounce is getting a bit more airtime with this week's ECB drawing unusual attention,” says Stephen Gallo, European head of FX strategy at BMO Capital Markets.

Australia’s Dollar was in demand on Tuesday while the U.S. Dollar retreated further from recent highs as appetite for risk assets appeared to be reinforced by reports suggesting the European Central Bank (ECB) will entertain a 0.5% increase in its interest rates this week.

That would be larger than the 0.25% step telegraphed as likely in June and would also follow last week’s fall in market-implied expectations for the Federal Reserve’s interest rate, which has stopped a runaway U.S. Dollar in its tracks and provided balm to previously stressed global markets.

Above: Pound to New Zealand Dollar rate at hourly intervals with Fibonacci retracements of July decline indicating possible areas of short-term technical resistance. Click image for closer inspection.

Tuesday’s rally for risky assets pulled the Pound to New Zealand Dollar rate back below 1.94 and has effectively scuppered Monday’s rally from last week’s lows and may mean that Sterling would be fighting a losing battle with any attempt at climbing back above that level later this week.

New Zealand’s Dollar is among the highest yielding currencies within the G10 contingent, which often leads it to outperform in markets where the U.S. Dollar is falling, although it has shared that mantle with the Canadian Dollar since the Bank of Canada (BoC) lifted its cash rate to 2.5% last week.

“The CAD isn’t participating as much in this move when compared against peers like the NOK, AUD and NZD. Then again, positioning is far more ‘clean’ for the CAD than in those other currencies so that might be part of the reason why,” says Bipan Rai, North American head of FX strategy at CIBC Capital Markets.

The Kiwi’s yield appeal was potentially burnished this week when inflation surprised on the strong side of market expectations and led some economists to revise forecasts for the Reserve Bank of New Zealand (RBNZ) cash rate. 

“It wasn’t just a stronger-than-expected headline CPI print that got us thinking the RBNZ will now deliver 50bp hikes all the way to 4% (previous forecast: 3.5%),” says Miles Workman, a senior economist at ANZ. 

Above: NZD/USD shown at hourly intervals alongside GBP/USD. Click image for closer inspection.

“It was the upside surprise on non-tradables (ie domestic) inflation and the further acceleration in core inflation that suggests high inflation could be a lot more persistent than previously thought,” Workman said on Tuesday. 

With the Kiwi’s yield appeal aside, the trajectory of the U.S. Dollar is also an important influence on many currencies and the New Zealand Dollar has typically been among the most susceptible to its twists and turns, which potentially has implications for GBP/NZD up ahead.

GBP/NZD could be most likely to trade within roughly a 1.9182 to 1.9385 range this week, according to the author’s model, which uses sensitivities to the U.S. Dollar and cross-currency triangulation to estimate where non-Dollar exchange rates would be likely to trade as the greenback rises and falls.

“NZD/USD broke the month-old downtrend, signalling further gains above 0.6200 during the next few days. Multi-week, though, we remain cautious,” says Imre Speizer, head of NZ strategy at Westpac. 

“The main drivers of NZD/USD at present remain global risk sentiment (recession risks are growing) and the US dollar (Fed tightening expectations have increased in the wake of strong inflation data),” Speizer added on Tuesday.

Above: NZD/USD shown at daily intervals alongside Pound to New Zealand Dollar rate. Click image for closer inspection.