- GBP/NZD may test 1.9205-1.9521 range bottom
- If commodity currency rally continues to lift NZD
- Expectations of RBNZ cash rate also bolster NZD
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Spot Market Rate at Publication:
The Pound-to-New Zealand Dollar rate reached four-month lows early this week and could remain under pressure in the short-term if the Kiwi Dollar continues to benefit from a commodity currency rally and financial market expectations for Reserve Bank of New Zealand (RBNZ) interest rate policy.
Pound Sterling had slipped below 1.93 against the New Zealand Dollar by Tuesday as the Kiwi currency continued a week-long outperformance of major counterparts, which threatens to push GBP/NZD as far as 1.9205 and May 2021 lows over the coming days.
New Zealand’s Dollar has benefited from the twin tailwinds of robust international enthusiasm for commodity currencies as well as a further market reappraisal of the outlook for RBNZ interest rates in the wake of third-quarter inflation figures released this week.
“The USD has retreated, and yesterday’s NZ Q3 CPI data has caused a sharp jump in NZ-US yield spreads. We would buy any pullback to 0.6985 – the earlier break level. Longer term, we continue to target 0.7400 by year end,” says Imre Speizer, head of NZ strategy at Westpac, referring to NZD/USD.
The ongoing break higher in NZD/USD has been an important and direct driver of the nascent decline in the Pound-to-New Zealand Dollar rate, which tends to closely reflect the relative performance of NZD/USD and the slightly less buoyant GBP/USD.
Above: Pound-to-New Zealand Dollar rate shown at daily intervals with major moving-averages and Fibonacci retracements of 2021 rally.
Retracements indicate possible areas of support for Sterling while moving-averages flag possible sites of technical resistance to any recovery.
Exactly how far the Pound-to-New Zealand Dollar rate falls would depend on the extent of any further rally in NZD/USD, which had risen above its 200-day moving-average at 0.7098 on Tuesday and appeared on course for an imminent revisit to early September’s high at 0.7170.
The Pound-to-Kiwi rate would trade as low as 1.9205 should NZD/USD reach that level and if in the meantime the main Sterling exchange rate GBP/USD proved unable to advance beyond Tuesday’s 1.3777, although any rise in GBP/USD would temper the downside in GBP/NZD.
“Given the intensity of medium-term inflation pressures, we are now forecasting the RBNZ to take every opportunity it gets over the next while to raise the OCR. In short, the very strong inflation pulse has taken away the luxury of time and caution,” says Finn Robinson, a senior economist at ANZ.
ANZ raised forecasts for the RBNZ cash rate on Tuesday and brought forward to August 2022 the time at which the benchmark is estimated to reach 2%, which implies a much quicker cycle of interest rate rises than either the market or RBNZ itself had thought likely earlier in October.
Assumptions contained in August’s monetary policy statement suggested it would take until the end of 2023 for the cash rate to reach 2% while the bank said in October's policy decision statement that future decisions would be guided by the medium-term outlook for inflation and employment.
“Yesterday’s strong Q3 CPI print has bolstered expectations for RBNZ rate hikes and therefore NZD,” says Kim Mundy, a senior economist and currency strategist at Commonwealth Bank of Australia, who tips AUD/NZD to remain below 1.05 throughout the week.
Statistics New Zealand said this week that Kiwi inflation reached 4.9% in annual terms last quarter, its highest for over a decade, after 10 of the 11 main groups in the consumer price basket rose during the period.
Housing-related costs including those incurred during construction were the main drivers of move, indicating that Kiwi inflation pressures are more than just a reflection of this year’s increased commodity prices, which are also adding to inflation in New Zealand as well as many other parts of the world.
“With the RBNZ at the front of the pack in the global monetary tightening phase, all else equal, that speaks to a higher NZD –hence our forecast of moderate strength into year-end,” says David Croy, a currency strategist at ANZ and colleague of Robinson.
Above: NZD/USD shown at daily intervals with major moving-averages and Fibonacci retracements of September decline indicating possible areas of technical resistance to Kiwi Dollar gains.