GBP/NZD Rate’s Rebound Could Unwind Further 

• GBP/NZD risks unravelling back toward August lows
• After recovery attempt loses momentum above 1.91
• Outperforming NZD shrugs off NZ’s retail sales slide 
• GBP underperforming with lower yielding currencies 

Image © Adobe Stock

The Pound to New Zealand Dollar exchange rate began to unwind a short-lived mid-month recovery this week but would be likely to unravel further in the days ahead if the Kiwi continues to outperform while Sterling remains a laggard among the major currencies.

New Zealand’s Dollar outperformed on Thursday in a buoyant market for Asia Pacific currencies and after benefiting from a broad softening of the U.S. Dollar ahead of Friday’s appearance by Federal Reserve Chairman Jerome Powell at the annual Jackson Hole Symposium for central bankers.

“Those currencies are likely taking their cues from RMB, at least in part,” says Greg Anderson, global head of FX strategy at BMO Capital Markets, in a Thursday market commentary. 

“According to Bloomberg, SAFE set China's opening fix or reference rate for onshore USDCNY at the strongest relative to expectations (built from formulas dependent on overnight moves in other currencies) since February 2020. This comes on the heels of a Reuters report that authorities called key Chinese banks to warn them against shorting the RMB aggressively,” he added.

Above: Pound to New Zealand Dollar rate shown alongside NZD/USD and Renminbi-Dollar rate (blue line).

New Zealand’s Dollar shrugged off poor second quarter retail sales data when outperforming all G10 currencies except the Australian Dollar on Thursday but would likely need a further retreat by the U.S. Dollar in order to drive an extended decline in GBP/NZD over the coming days.

“Retail sales activity fell 2.3%in Q2, much weaker than our and the market’s expectation for a 1.7% q/q rise. The fall presents downside risk to our Q2 GDP forecast of 1% q/q,” says Miles Workman, a senior economist at ANZ.

“However, other observations over Q2 continue to suggest inflation pressures are still building, so the RBNZ is unlikely to draw any strong conclusions on the back of this one volatile piece of data,” Workman said on Thursday. 

The U.S. Dollar has fallen since S&P Global PMI surveys sounded the alarm about conditions within the U.S. services and manufacturing industries for a second month running  on Tuesday, offering respite to a previously under pressure Kiwi while weighing heavier around the ankles of GBP/NZD. 

Above: Pound to New Zealand Dollar rate shown at 2-hour intervals alongside NZD/USD.

GBP/NZD would risk falling further, however, if the U.S. Dollar remains on the back foot following Friday’s speech from Fed Chairman Jerome Powell because the Kiwi might benefit from this more than Sterling due to higher bond yields and less onerous commodity price pressures.

“While Jackson Hole captures much of the focus, we note that ToT [terms of trade] and relative commodity prices remain key FX drivers,” says Mark McCormick, global head of FX strategy at TD Securities.

“ToT momentum has recently explained about a third of the price action, underscoring the importance of the commodity winners/losers,” McCormick wrote in a Thursday research briefing. 

Prices of New Zealand’s food exports have risen this year and the economy is less reliant on imported energy than Europe where the UK and others face supply disruptions and crippling price increases that are weighing on currencies.

Above: Pound to New Zealand Dollar rate shown at daily intervals with Fibonacci retracements of May fall indicating possible areas of technical resistance for Sterling. Click image for closer inspection.

But energy prices and other headwinds like multi-decade highs for inflation are just a part of the reason why GBP/NZD was unable to make it far above 1.91 during the short-lived recovery attempted last week.

Reserve Bank of New Zealand (RBNZ) interest rate policy has also been supportive of the New Zealand Dollar and a headwind for GBP/NZD, which could also be impacted by any relevant remarks from Governor Adrian Orr when he speaks at the Jackson Hole Symposium late on Thursday. 

“The Kansas Fed will release the full agenda for the Jackson Hole symposium tonight. So far, we know that Powell will speak at 10:00 ET tomorrow. BoJ Governor Kuroda and RBNZ Governor Orr are confirmed attendees,” says Adam Cole, chief FX strategist at RBC Capital Markets.

The RBNZ lifted its cash rate to 3% last week and warned that it could rise to more than 4% by early next year, citing robust levels of consumer demand and a tight labour market that has recently driven private sector wage growth to 7%. 

Above: Pound to New Zealand Dollar rate shown at daily intervals with Fibonacci retracements of 2021 uptrend indicating possible areas of technical support for Sterling. Click image for closer inspection.