BNZ Forecast New Zealand Dollar to Strengthen Against Pound Through 2018 but Conviction is Low

Analysts at one of New Zealand's largest banks tell corporate clients the New Zealand Dollar should strengthen against Sterling through 2018.

BNZ say they expect the Pound to decline against the New Zealand Dollar over coming months, as jitters over New Zealand's political transition fade and the ever-present uncertainty posed by Brexit remain.

The Pound’s Brexit headache needs no introduction - uncertainty as to the UK’s future trade relationship with the European Union is often cited as a reason for recent weakness and expected future weakness.

This weakness should push the GBP/NZD exchange rate lower says BNZ’s Jason Wong, who does however concede there is a low conviction on his call but nevertheless urges corporates to hedge appropriately.

“GBP is more difficult than usual to predict, with binary outcomes depending on how Brexit negotiations proceed. We’d recommend fully hedging known cashflows to mitigate against swings in the cross,” says Wong.

The Pound has strengthened against the New Zealand since August when the GBP/NZD was quoted towards 1.74.

It has since recovered to above 1.90 with a particularly strong rally being realised in September when markets began to start aggressively pricing an interest rate rise at the Bank of England in November.

The New Zealand Dollar at 1.9138 is now actually at its lowest level against the Pound since July 2017.

But, Wong says the move by the Bank of England is now “well-priced by the market, and the bigger question is how will the economy cope with tighter monetary conditions against the backdrop of soft growth and heightened uncertainty about the outlook.”

Most analysts point out that a 0.25% interest rate rise would still leave UK monetary conditions more generous than they were prior to the Brexit referendum, something Wong appears to be discounting.

Nevertheless, Wong is looking to maintain his long-held conviction that the Pound is going lower against the New Zealand Dollar thanks to a view that the UK exiting the European Union is negative for the currency:

“Lingering uncertainty about the UK outlook can continue for many years to come, even if the worst-case scenario of a cliff-like hit in March 2019 post-Brexit can be avoided.”

Above: The GBP/NZD could bottom towards 1.78-1.80 in early-2019.

There is a risk that the negative-GBP call proves wrong, particularly if the UK economy doesn’t actually fall off the cliff that economists said would happen ever since June 2016.

Indeed, the "binary outcomes" flagged by Wong remain a significant risk - i.e. a transitional Brexit deal is reached and the UK and EU continue to trade more-or-less as they have done so for years.

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New Zealand Dollar’s Politically-Inspired Dip Might be Over

The New Zealand Dollar has suffered notably of late owing to the political transition currently underway in the country.

BNZ reflect that, “domestic political forces have not been kind to the NZD, as the Labour-led government is seen to be not as market-friendly compared to the previous administration.”

The New Zealand Dollar is, as a result, at its lowest level against the Pound since July 2017. Against the US Dollar, the NZD/USD is seen at 0.6836 which is the lowest level since May, but a break below current levels risks sending the exchange rate down to June 2016 lows sub-1.067.

Wong argues there remains much uncertainty about the policy outlook provided by the incoming administration, with the devil in the details.

“Our working assumption is that the market has over-reacted, as currencies are apt to do, but until the policy detail is released, then some sort of political risk premium will be built in the NZD,” says Wong.

BNZ say their projections for the NZD to track around USD0.69-0.70 through to the end of next year have remained unchanged for over two months now.

We would assume that the assumption nerves towards the NZD will settle when the new Government hits its stride will also feed into the lower GBP/NZD exchange rate being projected by BNZ.