New Zealand Dollar to Fall Against the Pound Sterling and Euro Say Bank of New Zealand

The Pound Sterling and Euro will be among the greatest beneficiaries of a weaker New Zealand Dollar and further declines for the US Dollar in 2018. 

The New Zealand Dollar has emerged resurgent from the festive break, storming ahead against the Dollar and many of its international rivals, although strategists are now warning that this strength will not last.

New Zealand’s currency has risen against all the G10 members except the Pound and Norwegian Krone this January as fears of economic catastrophe in the wake of last year’s election fade.

It had fallen by as much as 6% against the US Dollar during the final quarter of 2017, as markets feared the new government’s policies would hit the economy, although a decline in business confidence is about as much as has been observed so far.

However, the New Zealand Dollar is now vulnerable to a another leg lower over the course of 2018, with the very best odds favouring a weaker Kiwi Dollar relative the Pound Sterling and the Euro.

“After underperforming last year, the NZD has begun 2018 on a stronger note, but this positive momentum isn’t expected to be sustained,” says Jason Wong, a markets strategist at Bank of New Zealand, a division of National Australia Bank.

Weakening fundamentals will be behind the downward move in the NZD, brought on by a rise in global interest rates that is expected to reduce the relative attractiveness of Kiwi bonds.

As a faster growing developed market, New Zealand bonds have traditionally offered a higher yield than many of their G10 counterparts, which has helped support the New Zealand Dollar.

But, with the NZ cash rate likely to remain stuck at a record low of 1.75% for the foreseeable future while other central banks are raising their own interest rates, this yield premium and support for the currency look set to diminish.

Meanwhile, the Pound and Euro are set for another good year.

Above: Pound-to-New-Zealand-Dollar rate shown at weekly intervals.

Advertisement
Get up to 5% more foreign exchange by using a specialist provider to get closer to the real market rate and avoid the gaping spreads charged by your bank when providing currency. Learn more here.

“Our biggest call is for EUR and GBP to maintain their upward trend, which sends NZD crosses lower. Despite their outperformance last year, EUR and GBP real exchange rates remain below average, making them still cheap in a longer-term context,” Wong writes, in BNZ’s latest currency market review.

For the Pound, slow but steady progress in the Brexit negotiations is expected to culminate in a so called transition deal before March, which its is hoped will help support the Pound as discussions on future trade progress.

A transition deal will ensure the status quo remains in place for almost another two years after what it supposed to be the official Brexit day on March 29, 2019.

“Buying time provides some much needed breathing space and is expected to allow GBP to recover amidst improved business confidence, as market access to the EU is maintained for another few years,” says Wong.

The Euro has risen by a staggering 15% against the US Dollar during the 12 months to January 19, which has been driven by traders betting on an end to the European Central Bank’s quantitative easing program.

Current expectations are for the ECB to turn off the easy-money taps in September 2018. Most forecasters say the common currency will see another good year as a result of this.

“We also look for the ECB to adjust its deposit rate from -0.4% to zero, in order to demonstrate that a negative rate was introduced as part of its emergency policy settings and, alongside the end of QE, a negative interest rate is no longer required,” says Wong.

Above: EUR/NZD rate shown at weekly intervals.

Both of the above sets of factors are expected to support the Euro and Pound against the US Dollar, which weakened notably in 2017 and has gotten off to a poor start in 2018.

The Dollar index has fallen by 10.5% during the 12 months to January 19 and Wong says it is now beginning to look oversold.

This isn't great news for the Kiwi currency given that it lacks the kind of bullish supporting narrative that is currently helping to drive the Pound and Euro higher. 

“For now we stick with our forecasts of the NZD reverting towards a USD 0.68-.0.70 level for much of this year, but we’re closely watching the lurch down in the USD since mid-December,” the strategist writes.

Above: NZD/USD shown at daily intervals.

Both GBP/NZD and EUR/NZD are foreign exchange cross rates and as such, are calculated by dividing GBP/USD and EUR/USD over NZD/USD.

Wong’s bullish expectations for the Pound and Euro relative to the NZD are therefore, contingent to at least some extent on renewed weakness in the NZD/USD rate.

“Targets we have in mind for NZD/EUR and NZD/GBP through the year are EUR 0.56 and GBP 0.48 respectively,” Wong writes.

These forecasts translate to 1.7857 for EUR/NZD and 2.08 for GBP/NZD. Wong’s projections suggest the Euro will rise by 6.2% against the Kiwi Dollar this year and the Pound will gain a considerable 9.4%.

The Pound-to-New-Zealand-Dollar rate was quoted 0.12% lower at 1.9022 Friday while the Euro-to-New-Zealand-Dollar rate was marked 0.14% higher at 1.6795.

Readers can learn more about what analysts and strategists say is in store for the New Zealand Dollar in 2018 here; Compilation of Major Bank Forecasts, Currency Views for 2018.

Advertisement
Get up to 5% more foreign exchange by using a specialist provider to get closer to the real market rate and avoid the gaping spreads charged by your bank when providing currency. Learn more here.