Stalled New Zealand Dollar Recovery Supports GBP/NZD Near November Lows 

 "Our forecasts signal that the low in the NZD is in and the NZD will appreciate over 2023. However, we are forecasting that to occur after an upward correction in the USD over Q1/Q2" - ANZ.

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The Pound to New Zealand Dollar exchange rate edged higher from near November lows this week but could struggle to advance much further from current levels without a partial unwinding of a now-stalled recovery in NZD/USD or a broader rebound in U.S. Dollar exchange rates up ahead.

New Zealand's Dollar was a laggard among major currencies on Wednesday amid a lacklustre performance from currencies in the Asia Pacific region where the Australian Dollar underperformed many counterparts while, in Europe, Sterling and others appeared to benefit from an appreciation of the Euro.

This was after Eurozone growth was revised higher from 0.2% to 0.3% in Eurostat's final estimate of third quarter output while Australian data underwhelmed a consensus that had looked for a 0.7% expansion with Aussie growth actually slowing to 0.6%, from 0.9% previously.

"Public demand and net exports dragged on growth. We expect momentum in the economy to slow materially from here as households and businesses adjust to higher interest rates," says Kim Mundy, a senior economist and currency strategist at Commonwealth Bank of Australia. 

Above: GBP/NZD shown at 2-hour intervals alongside USD/NZD, USD/AUD and U.S. Dollar Index (DXY). Shows GBP/NZD often follows broad contours of USD/NZD and Dollar Index. Click image for closer inspection.

Australia is among New Zealand's largest export markets and so developments there can impact the outlook for the Kiwi currency and economy with implications for GBP/NZD but much about the outlook for the Sterling pair also depends on price action in NZD/USD and the U.S. Dollar more broadly.

"NZD/USD price action has been strong of late. Much of this has been a USD story, but higher NZD interest rates have also contributed, as has short positioning (forcing traders to cover)," says David Croy, an FX strategist at ANZ. 

"Our forecasts signal that the low in the NZD is in and the NZD will appreciate over 2023. However, we are forecasting that to occur after an upward correction in the USD over Q1/Q2 as the US Federal Reserve ratchets up its hawkish rhetoric, and markets contemplate the end of the RBNZ tightening cycle and slower NZ growth," Croy writes in a Wednesday research briefing.

GBP/NZD tends to closely reflect the relative performance of Sterling and the Kiwi when each is measured against the U.S. Dollar but in a way that tends to leave it negatively correlated with NZD/USD, hence why the trajectory of the greenback and NZD/USD matter when it comes to the outlook. 

Above: GBP/NZD shown at daily intervals alongside USD/NZD, USD/AUD and U.S. Dollar Index (DXY). Shows GBP/NZD often follows broad contours of USD/NZD and Dollar Index. Click image for closer inspection. To optimise the timing of international payments you could consider setting a free FX rate alert here.

This was demonstrated again in November when Sterling spent much of the month suppressed by the Kiwi amid widespread and heavy selling of the U.S. Dollar, which was previously the market's favourite candidate for appreciation before that wave of profit-taking reduced the market's 'long' position to zero.

"That position is far cleaner and some have even gone outright short the USD at current levels. I think calls for a USD down move are calling for something that has already happened, so I am not too excited about further USD weakness from here," says Brad Bechtel, global head of FX at Jefferies, 

"I think the market will be relatively close to home as we head into next week's data dump and then some year-end rebalancing will take over and that is a coin flip on direction from there," Bechtel writes in a Wednesday market commentary.

GBP/NZD would potentially benefit early on next year if Croy and the ANZ team are right to expect the U.S. Dollar to rebound from November's losses but Sterling would likely struggle get far off the ground in the interim Jefferies' Bechtel is right to anticipate a largely directionless U.S. Dollar into year-end. 

Above: GBP/NZD shown at weekly intervals alongside USD/NZD, USD/AUD and U.S. Dollar Index (DXY). Shows GBP/NZD often follows broad contours of USD/NZD and Dollar Index. Click image for closer inspection. If you are looking to protect or boost your international payment budget you could consider securing today's rate for use in the future, or set an order for your ideal rate when it is achieved, more information can be found here.