Pound a Sell vs. New Zealand Dollar in 2021 at Morgan Stanley

New Zealand Dollar forecast 2021

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  • GBP/NZD spot rate at time of publication: 1.8989
  • Bank transfer rate (indicative guide): 1.8320-1.8450
  • FX specialist providers (indicative guide): 1.8500-1.8800
  • More information on FX specialist rates here

Foreign exchange strategists at investment bank Morgan Stanley have made selling the Pound against the New Zealand Dollar a conviction trade for 2021.

"Commodity currencies should see the most benefit due to the global recovery, their historical sensitivity to risk assets and higher probability of seeing their local central banks turning hawkish. We expect NZD, NOK, CAD and AUD to outperform other G10 currencies in 2021, rising most in 1H21. NZD and NOK in particular benefit from relatively hawkish central banks," says Matthew Hornbach, Global Head of Macro Strategy at Morgan Stanley.

In a year-ahead strategy publication, analysts at the Wall Street bank say they look to "sell GBP/NZD as a relative value trade", with the New Zealand Dollar outperforming rivals in 2021 as the Reserve Bank of New Zealand (RBNZ) will likely surprise markets to the "hawkish side".

The New Zealand Dollar underwent a period of notable underperformance in mid-2020 as markets rapidly ramped up expectations that the RBNZ would slash interest rates into negative territory in early 2021.

However, an improving global economic backdrop on hopes that a covid-19 vaccine will unlock a strong recovery in 2021 has apparently shifted the RBNZ's view, and the market's pricing of a rate cut has diminished notably.

Aiding this shift in view was news this week that the country's government pressed the RBNZ to target house prices in their policy decisions in the future, a development that resulted in the currency rallying.

While it is too soon to speculate as to what the intervention will mean for RBNZ policy going forward, the market has interpreted this as a signal further interest rate cuts will be unpalatable on a political level.

A text-book foreign exchange rule says that when a central bank exits a cycle of interest rate cutting its currency finds support and when odds of the next move being a rate hike grow, the currency appreciates.

This appears to be the current dynamic involving the RBNZ and NZ Dollar.

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GBP/NZD Forecasts 2021

Period: Full Year 2021
Details: Consensus institutional forecast targets + max & min targets.
Contributors: Citi, Barclays, Morgan Stanley & more
Provider: Global Reach Partners
Type: Free Download

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FX for Businesses Guide

Period: 2021
Details: How to hedge, Market Orders,
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On the matter of Sterling, Morgan Stanley say they expect the EU and UK to achieve a post-Brexit trade deal, which will allow the Pound to rally against the U.S. Dollar.

The rally could last into the first three months of 2021, "as optimism reduces the GBP risk premium," says Hornbach. "But then an underperformance in UK growth and the lowest real yields in the G10 make GBP an underperformer into the end of 2021."

There is no target for the trade.

However, the house forecasts for GBP/USD are 1.35 by mid-2021, 1.32 by September 2021 and 1.32 by end-2021.

The NZD/USD exchange rate is forecast at 0.72, 0.73 and 0.74 for the same time frames.

This gives a Pound-to-New Zealand Dollar exchange rate cross with targets at 1.8750, 1.8082 and 1.7837.

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