- NZD slides to bottom of major bucket after RBNZ says to act further.
- Preparations for negative rates and foreign asset purchases continue.
- NZD under spotlight as strength seen weighing on exports, recovery.
- GBP/NZD correction could put 1.97 in sight on further Kiwi retreat.
Image © Pound Sterling Live, Still Courtesy of RBNZ
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The New Zealand Dollar was down for the count across the board Wednesday after the Reserve Bank of New Zealand (RBNZ) fired another warning shot across the bow of the currency market, wobbling the Kiwi while encouraging the tentative correction higher in the Pound-to-New Zealand Dollar rate.
New Zealand's central bankers left the cash rate unchanged at its current record low of 0.25% in June and agreed to continue the Large Scale Asset Purchase Programme that will eventually see the RBNZ acquire NZ$60 bn of government bonds, in line with market expectations.
The RBNZ noted that with the coronavirus all but vanquished from New Zealand the economy has reopened sooner than was assumed in the May policy statement and that government fiscal support had been larger than was expected, but warned that "significant economic challenges remain" and stood by its assertion that "the balance of economic risks remains to the downside."
"The RBNZ has continued to reiterate that it is prepared to do more stimulus if needed and is working on getting the monetary tool kit fleshed out. The statement had a dovish tinge to it," says Nick Tuffley, chief economist at ASB Bank. "We expect NZ’s borders to remain shut for a while yet, for economic activity to be about 5% lower over 2020 and for the unemployment rate to end this year close to double the rate at which it started 2020. Interest rates are expected to remain very, very low for a long time."
Above: New Zealand Dollar performance against major rivals Wednesday. Source: Pound Sterling Live.
The rub for the Kiwi is the bank also said it's working to ensure a wider array of tools become available in the months ahead, including a negative interest rate as well as a capacity for "foreign asset purchases" that would enable the bank to dump large clips of New Zealand Dollars on the market.
The Kiwi Dollar is a problem for the RBNZ now that investors are preoccupied with a global economic recovery narrative and New Zealand has made such good time in putting the coronavirus away, which enabled the domestic economy to reopen much earlier than with other developed world countries.
"The RBNZ would no doubt prefer a lower exchange rate, but it's not clear that the NZD should be lower given how well placed New Zealand is relative to other countries," says Sharon Zollner, chief economist at ANZ. "The message for the currency market seems clear though."
From its low following the May 13 RBNZ decision to the peak seen on June 11 the NZD/USD rate had risen 9.7%, taking its gain since March 19 to 20.46%
But at 0.6438 on Wednesday, the Kiwi was still down by nearly -5% against the U.S. Dollar for 2020, and around breakeven against Pound Sterling.
Above: NZD/USD rate shown at daily intervals with Fibonacci retracements of March-to-June recovery.
Gains for NZD/USD have helped drive steep declines in the Pound-to-New Zealand Dollar rate since mid-April which have also been aided by widespread underperformance in Sterling. The pair fell nearly -10% between April 15 and the low on June 23, but was down only -0.99% for 2020 on Wednesday.
"When you consider NZD’s overall performance it is clear that the RBNZ’s bar of acceptance of NZD strength is pretty low. The RBNZ’s own NZD TWI has been trending weaker since 2017 and remains around 10% weaker from the highs in early 2017. It has jumped by about 6% since mid-May and this move is what’s concerning the RBNZ," says Lee Hardman, a currency analyst at MUFG.
NZD/USD was down -0.60% on Wednesday, placing the Pound-to-New Zealand Dollar rate on course for a second consecutive gain over the Kiwi.
But much about the outlook depends as much on the performance of GBP/USD as it does the New Zealand Dollar. The Pound-to-New Zealand Dollar rate is an amalgamation of NZD/USD and GBP/USD so will reflect both losses in the former as well as price action in the latter.
Above: Pound-to-New Zealand Dollar rate at daily intervals with selected moving-averages. Click for enlarged image.
NZD/USD has resisted moves below 0.64 of late and benefits from a 21-day moving-average at 0.6413 that technical analysts might view as a source of support, although it would also encounter the 23.8% Fibonacci retracement of its March-to-June recovery trend at 0.6320 if the former gives way.
Meanwhile, GBP/USD turned lower on Wednesday after failing to overcome its own 21-day moving-average in the prior session and as the U.S. Dollar stabilised. It was falling but had a 55-day moving-average ahead of it at 1.2428 and a 38.2% Fibonacci support atr 1.2278 to break its fall.
"With investors increasing their bets over a fast economic recovery as restrictions around the globe continue to ease, as a risk-linked currency, the Kiwi may continue to benefit. Thus, we would treat the overnight slide, or any short-term extensions of it, as a corrective move before another leg north. As we noted in the past, we prefer to exploit any further gains in risk-linked currencies against safe havens, like the dollar and the yen. For example, we see decent chances for NZD/USD to turn north again," says Charalambos Pissouros, a senior market analyst at JFD Group.
An NZD/USD fall to 0.64 that plays out alongside a GBP/USD decline to 1.2428 would put the Pound-to-New Zealand Dollar rate at 1.9418.
Above: GBP/USD at daily intervals with Fibonacci retracements of March-to-June recovery. Click for enlarged image.
Declines to 0.6320 and 1.2270 for NZD/USD and GBP/USD respectively would lift the GBP/NZD exchange rate to 1.9488.
However, if GBP/USD proved more resilient than its Kiwi counterpart and held the 1.2428 level as NZD/USD declined back to 0.63, the Pound-to-New Zealand Dollar rate would rise to 1.9726.
The rub for Sterling though is that many analysts see NZD/USD renewing its upward climb over the coming weeks as investors hope for a swift global recovery and favour commodity assets as a result, which would imply losses for the Pound-to-New Zealand Dollar rate.
An NZD/USD rate that renews its pre-existing path to the upside and retests its June high around 0.66 would require GBP/USD to rise from near 1.25 all the way to 1.28 just to avert a decline in GBP/NZD.
The Pound-to-New Zealand Dollar rate would fall to 1.8939 if GBP/USD remained around 1.25 while NZD/USD hits 0.66, and would face substantial downside if GBP/USD began falling as NZD/USD rises.
That leaves as much to be determined by developments in London, notably around the Brexit process and Bank of England (BoE) monetary policy, as it does New Zealand.
Above: Pound-to-New Zealand Dollar rate at weekly intervals with Fibonacci retracements of 2016-2020 referendum recovery. Click for enlarged image.
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