Is the Pound's Rally Against New Zealand Dollar Now Dead?

The Pound might have peaked against the New Zealand Dollar in the wake of an highly-anticipated Bank of England event.

The Pound-to-New Zealand Dollar exchange rate fell after the news that the Bank of England (BOE) decided to increase base interest rates by a quarter of a percent to 0.50% at their rate meeting on Thursday.

Normally an increase in interest rates has the opposite reaction and would be expected to strengthen the Pound, because higher interest rates attract increased flows of foreign capital seeking higher returns, but not in this case.

The Pound fell after the meeting due to widespread buying before the event, as investors betted on the hike prior to the release so convinced they were that it would happen, and this pushed up Sterling to a level which was over-priced going into the announcement.

In addition, the wording of the accompanying statement did not give the market much confidence that the BOE was in a hurry to raise rates again, a fundamental concern of the markets.

Another factor was the fact the BOE deleted a line from its prior statement which read that it was intending to raise interest rates at a quicker pace than markets currently expected.

This suggested the BOE might be following a 'one and done' strategy.

The Pound-to-New Zealand Dollar fell from a pre-announcement level of 1.9177 to lows of 1.8990 as Sterling weakened.

Brexit risks also appeared to dampen the outlook as the Bank said it sees "considerable risks" to the outlook from "Brexit".

The BOE's Monetary Policy Committee (MPC) which is tasked with setting the rate voted by a majority of 7-2 in favour of increasing rates.

Those who anticipate Sterling weakness going forward believe that the Bank will likely only raise interest rates once - at most - over the course of the coming year.

"Before today, market pricing for rate hikes over the next two years by the MPC equalled that for the Federal Reserve. The logic behind these expectations is sure to be tested and we believe Sterling weakness in response to this dovish hike is more than justified," says Timothy Graf, head of macro strategy for EMEA at State Street Global Markets.

Kiwi Downtrend Broken?

The BOE-inspired fall in the Pound breaks a prolonged uptrend against the previously much weaker New Zealand Dollar, which had suffered due to political risks after the general election.

Whilst one down day does not a reversal of trend make, its possible this could be the start of further downside for the pair.

The market may have got the pricing wrong for the Kiwi, which should actually be stronger than it is, according to research from BNZ's Head of Research Stephen Toplis.

Toplis thinks traders have been overly pessimistic about the impact of the policies of the new NZ government on the Kiwi.

Fears they would promote an insular, xenophobic, agenda averse to trade with the outside and foreign investment are overdone, argues Toplis, as the only policy of that kind to have emerged so far has been a minor prohibition on foreigners purchasing existing (but not new build) New Zealand properties.

He, therefore, sees the Kiwi rising in the short-term - with the Bank of England's dovish hike no doubt speeding that transition.

Get up to 5% more foreign exchange by using a specialist provider by getting closer to the real market rate and avoid the gaping spreads charged by your bank for international payments. Learn more here.