New Zealand Dollar Could Find the Going Tough in August, Nurses Monthly Loss against Pound Sterling

- NZD continues to lose value vs. GBP
- GBP/NZD up 2.28% in July
- NZD faces RBNZ hurdle on August 12

NZ Dollar

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The Pound-to-New Zealand Dollar exchange rate continues its short-term march higher, with the pair looking on track to secure a seventh successive day of gains should the current 0.40% daily advance hold into the close.

In doing so, the pair will have secured a second consecutive weekly advance which it has not managed since late March when the the covid-19 market meltdown ended and a period of aggressive New Zealand Dollar recovery commenced.

Following three months of decline, the GBP/NZD exchange rate formed a base through July, with a touch of 1.90 giving way to a recovery back to current levels around 1.9642 which has the pair sitting on a 2.28% gain for the month.

Sterling's recent advances against the Kiwi come despite a broader backdrop that would typically be expected to benefit the NZ Dollar. We reflected in Friday's GBP/AUD piece that something peculiar has occurred over the past 48 hours: the Pound has outperformed the 'dollar bloc' currencies such as CAD, AUD and NZD in both 'risk on' and 'risk off' markets: i.e. the Pound has risen against these 'risk on' currencies when stock markets are both falling and rising.

Typically, in the coronavirus era we would expect the dollar bloc currencies to rally against Sterling when stock markets are appreciating; but Friday's broad recovery in the world's leading indices has not been met with GBP/AUD or GBP/NZD gains.

Taking note of a potential shift in foreign exchange market themes is Mazen Issa, Senior FX Strategist at TD Securities who says the foreign exchange market's relationship to equity market performance does appear to be breaking down:

"We note that the equity correlations have started to flip. We see this across much of the G10, but specifically note that 20D rolling correlations (on 5-day log returns) have seen the dollar bloc's correlation to equity returns weaken considerably."

The developments are in their infancy and therefore might fade as August commences - often month-end flows can cloud the underlying picture - but should Sterling hold around coming levels over the course of the coming week we will find ourselves turning increasingly bullish on the prospects of GBP/NZD going higher.

GBP/NZD forecast

The New Zealand Dollar could meanwhile face domestic headwinds over coming weeks we are told.

"We think the NZD's air time is starting to look precarious as we move into August, when the RBNZ is poised to increase its LSAPs," says Issa.

LSAP is the Reserve Bank’s Large Scale Asset Purchases (LSAP) programme (aka quantitative easing), which sees the RBNZ inject 'easy' money into the economy by buying up to NZ$60BN of Government and Local Government Bonds.

The scale of the purchases as a proportion of the country's economy is relatively large compared to other comparable programmes elsewhere in the world, which could well place pressure on the New Zealand Dollar going forward.

A sizeable increase in the LSAP at the RBNZ's August 12 meeting is seen as being the key domestic hurdle in facing the NZ Dollar over coming weeks.

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GBP/NZD forecast

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