Pound v New Zealand Dollar Exchange Rate Finds Tentative Support

The pound sterling appears to have finally found support against the New Zealand dollar following a days of declines.

A powerful rally by the New Zealand dollar has pushed the GBP-NZD exchange rate lower towards 2.3262 after the RBNZ cut their main policy rate from 3.25% to 3.00%.

Interest rate cuts have, in the past, prompted sharp decline in the New Zealand dollar exchange rate complex; the trend lower over recent months has been linked almost exclusively to the downward trajectory in New Zealand interest rates.

The strong rally in NZD following the July cut shows currency traders are concerned the RBNZ intend to step back from their rate cutting regime as they now believe the NZD has depreciated too quickly. 

Looking at the foreign currency markets we see stability has returned to the NZD crosses ahead of the weekend:

• The pound to New Zealand dollar exchange rate is 0.30 pct higher on day-to-day comparison at 2.3553.
• The euro to New Zealand dollar exchange rate is  unchanged on last night's close at 1.6629
• The New Zealand to US dollar exchange rate is 0.45 pct lower at 0.6579.
• The Australian to New Zealand dollar exchange rate is a quarter of a percent down at 1.1107.

Be aware that the above refer to the inter-bank market and the retail rate offered by your bank will suffer a significant margin cut. An independent currency payment specialist will however get you closer to the market, in some instances this can deliver up to 5% more currency. Find out more here.

As the below graph shows we are able to finally get a clearer technical picture on the GBP-NZD: 

Calling the resistance point at 2.40 was not hard as this round number clearly shows there is little buying interest at valuations above here.

We are now seeing support forming at the 20 day moving average located at 2.3393 - the pair has not fallen below here over the course of the previous 4 trading days.

Could this be the springboard to a restest of the 2015 best or will a break of this support open up the path to 2.2666?

Why Did the NZ Dollar Rally Following the Rate Cut?

The RBNZ has been agressively targetting the value of the currency over recent months in order to allow NZ exports to become more competitive on the international stage.

High exchange rates tend to price goods off the international stage and with Chinese demand for raw exports declining the New Zealand economy needs new markets.

“Interestingly, the Bank slightly tweaked its rhetoric against the currency levels in its latest statement. Previously, RBNZ would lament the high currency levels by stating that NZD is still overvalued and should fall further as significant downward adjustment is justified,” says Waqas Adenwala at 4Cast citing the change in tone over the value of the currency.

Adenwala notes that the latest meeting saw the Bank acknowledging the fall in exchange rate in recent months as it admitted that along with lower interest rates, the lower currency has permitted an easing in monetary conditions.

If the kiwi dollar is declining then the thinking is the RBNZ may entertain current valuations - hence the buying activity seen in the wake of the decision.

Longer-Term Outlook Still Negative for the New Zealand Dollar

We note that the lion’s share of the declines in the NZD will likely be owed to a substantial unwinding of negative bets against the kiwi dollar.

The markets have been pitted against the NZD for some time now and the move lower looked overextended, to say the least.

This change in positioning does not necessarily reflect a fundamental improvement for the better in New Zealand though.

“Nevertheless, RBNZ reminded that although currency depreciation would provide support to the export and import competing sectors, further depreciation is still necessary given the weakness in export commodity prices,” says Adenwala.

With inflation once again remaining soft, 4Cast anticipate the RBNZ to cut rates by 25bps once again in the Bank's upcoming meeting in September.

However, with Q1 2015 GDP data coming in significantly weaker than expected, 4Cast do warn that they expect the Bank to be more concerned about lower growth prospects as well in the economy and this may lead RBNZ to slash rates even further to 2.75% in the next meeting.

If this additional move on rates is delivered then we would expect the New Zealand dollar to fall substantially once more and re-exert its trend lower.

For now the pound / NZD exchange rate is capped by resistance at 2.40 and a swing in momentum could see further declines from here towards 2.26.