New Zealand Dollar Week Ahead Forecast: Lost Opportunities

• GBPNZD downside momentum fades
• Could pop back into previous range
• NZDUSD cools after strong rally
• NZ GDP is the week's data highlight
• But NZD to be buffeted by Fed midweek

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The New Zealand Dollar has lost an opportunity to press fresh multi-month highs against both the Pound and U.S. Dollar and a loss of momentum in what will be a busy week for global FX risks a setback.

In our previous Week Ahead, we wrote that the high-flying Kiwi was likely to keep the Pound and U.S. Dollar under pressure, thanks to the build-up of strong momentum that left it as the best-performing currency of the preceding month and week.

We looked for that momentum to extend and allow the NZD to deliver fresh multi-week highs against G10 peers, but fast-forward to a new week, and we see that strength has faded, and the Kiwi has not quite delivered the strength we were looking for.

As such, a test of the key 2.0266 support zone we were looking for in GBPNZD, when we last wrote our Week Ahead, is less likely at this juncture.

Instead, there is a real possibility that GBPNZD will break back into the October-November trend zone above 2.0583 and 2.0775. Monday's strong start certainly gives some confidence on this front.

Above: GBPNZD at daily intervals.

The coming week is particularly busy for the Pound with a number of crucial data releases and a Bank of England decision to look forward to; we take a look at these events, figures and expectations here.

The New Zealand Dollar is meanwhile paring its recent gains against the U.S. Dollar, which was entirely expected by those seeing how overbought NZDUSD was becoming, with the Relative Strength Index (RSI) moving above 70.

Typically, when this happens, the market must correct or consolidate to unwind from overbought:

Above: NZDUSD at daily intervals, with the RSI in the lower panel.

"The Kiwi's rejection above 0.6200 last week fits with our previous suspicion that it was getting technically stretched. We would still consider buying dips, with potential for a test of 0.6300 by late December," says Martin Whetton, a strategist at Westpac.

Whetton says recent New Zealand Dollar strength from sub-0.5900 to above 0.6200 was mostly driven by a softer run of U.S. data and rising bets for Federal Reserve rate cuts in 2024.

But, last Friday's strong jobs report challenged the run of softer U.S. data, prompting a Dollar rebound and restricting the NZ Dollar.

"The Kiwi ended the week lower as the USD rebounded in the wake of US labour market data that was stronger than expected and strong on job gains, unemployment, earnings, hours worked – the lot. Markets pared back expectations for Fed cuts, and that’s what’s weighing on the USD as we get underway this week," says David Croy, a strategist at ANZ.

As always, the U.S. and global picture will remain crucial for NZD direction, and this week's market highlight will be Wednesday's Federal Reserve policy meeting, where rates are expected to remain unchanged.

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Investors will be looking for any shifts in guidance about the outlook, and given the recent rise in Fed rate cut bets, any pushback from the Fed could encourage further USD strength and NZD weakness.

Domestically, New Zealand's GDP is the week's highlight and is due for release on Wednesday at 21:45 GMT. It is expected to show growth of 0.2% quarter-on-quarter in the third quarter, making for a rise of 0.5% year-on-year.

"This will be the last substantial piece of economic data for a month or so and will give us a steer on what kind of momentum there was in economic activity as we rolled into year-end," says Nathaniel Keall, Economist at ASB.

For the New Zealand Dollar, "anything stronger than we and the RBNZ are forecasting (+0.3%q/q) would likely give the Kiwi a boost, especially if it's either broad-based or by a wide margin," says Croy.

Likewise, any disappointment would potentially weigh on the Kiwi, an outcome Westpac expects:

"We've pencilled in a modest 0.1% decline in output, which is unchanged from the early estimate we made in late October in our updated Economic Overview," says Kelly Eckhold, Chief Economist for New Zealand at Westpac. "The economy largely treaded water in the September quarter."

The New Zealand Dollar has found some support over the recent weeks as markets bolster expectations for the New Zealand interest rate part by reducing the expected number of cuts to fall in 2024.

A strong GDP figure would feed into this narrative, offering the Kiwi further support.

"More generally the NZD has been well supported given the weaker trend in the USD of late and the RBNZ’s relatively hawkish policy stance," says Westpac's Eckhold.