GBP/NZD Rate Hits 2.0: Can it Hold?

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

The Pound to New Zealand Dollar exchange rate rose above 2.0 in the opening half of the week and could be likely to remain buoyant above roughly 1.98 if the Kiwi remains an underperformer among major currencies in the days and weeks ahead.

New Zealand's Dollar edged higher against many currencies on Wednesday but remained underwater relative to almost all G20 counterparts for the recent week, month and year-to-date following an underperformance that might have as much to do with offshore factors as it does the Kiwi economy.

Offshore headwinds include a slowing global economy and a falling Australian Dollar, both of which can impact demand for Kiwi exports such as dairy and meat, although the advanced stage and economic impact of the Reserve Bank of New Zealand (RBNZ) interest rate cycle is also potentially a driver too.

"The AUD moved lower overnight, though NZD was the big underperformer, pushing AUD/NZD back to 1.0750," says Brian Martin, an economist at ANZ.

GBP/NZD was up more than five per cent for the year on Wednesday and while it had an outperforming Pound as a driver in March, Kiwi Dollar losses have done much of the heavy lifting so far in April.

Above: Pound to New Zealand Dollar rate shown at daily intervals with Fibonacci retracements of 2023 rally indicating possible areas of short-term technical support for Sterling. Click image for closer inspection. 

Kiwi Dollar losses built further following last week's interest rate decision from the RBNZ, which raised its cash rate from 4.75% to 5.25% even as most economists looked for a smaller increase to only 5%.

The RBNZ attributed this as much to recent declines in wholesale funding costs for commercial banks as it did to anything else after the March failures of several small banks in the U.S. led funding costs to fall alongside government bond yields and market expectations for interest rates.

"The fall in wholesale rates, following weaker domestic data and concerning developments offshore, was working against the RBNZ’s desired path for policy. And that pre-set path has one more hike to 5.5%. We must expect a 25bp move in May," says Jarrod Kerr, chief economist at Kiwibank. 

The RBNZ also warned last week that it would raise rates further if the economy performs better than is expected, or if core inflation rate does not fall to the extent necessary up ahead, although it's far from assured that these conditions would materialise.

Not least because the latest figures suggested New Zealand's economy already grew at a slower pace than was expected by the RBNZ in the final quarter of 2022.

"The Committee was comfortable that current lending rates faced by businesses and households will help ensure core inflation and inflation expectations begin to moderate. However, wholesale interest rates have fallen significantly since the February Statement," minutes of the RBNZ meeting say.

Above: Quantitative model-derived estimates of probable trading ranges for selected currency pairs this week. Source Pound Sterling Live. (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.)

"This could put downward pressure on lending rates. As a result, a 50 basis point increase in the OCR was seen as helping to maintain the current lending rates faced by businesses and households, while also supporting an increase in retail deposit rates," the meeting record adds.

While RBNZ forecasts suggested in February that one further increase in the cash rate is likely later this year, the bank's most recent language hinted that many Kiwi policymakers may already be close to content with the current level of interest rates.

That may mean there is a risk of the RBNZ leaving its cash rate unchanged over the coming months, which would be a headwind for the New Zealand Dollar.

However, many analysts also view the slowing global economy as a likely burden for the Kiwi currency in any case going forward.

This could mean GBP/NZD is likely to retain much of its recent gain for a time, while the author's model suggests a rough 1.9837 to 2.0080 range is most likely for the weeks ahead.

Above: Pound to New Zealand Dollar rate shown at weekly intervals with spread or gap between yields on 02-year and 10-year UK and New Zealand government bonds. (To optimise the timing of international payments you could consider setting a free FX rate alert here.)