Pound-New Zealand Dollar Downtrend Arrested

- GBP/NZD advances a quarter of a percent
- NZD at risk of setback to global reflation theme
- GBP tipped to endure stronger 2021 despite sluggish start

New Zealand Dollar outlook

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  • GBP/NZD spot rate at publication: 1.8714
  • Bank transfer rate (indicative guide): 1.8060-1.8190
  • FX specialist providers (indicative guide): 1.8143-1.8500
  • More information on FX specialist rates here

The Pound-to-New Zealand Dollar exchange rate is attempting to rally from its recent floor, but the strong impetus behind the Kiwi looks set to ultimately win through in the near-term given a global backdrop of constructive investor sentiment.

Pound Sterling found a bid ahead of the weekend and rose against the majority of its major peers, with the GBP/NZD being no exception and advancing by a quarter of a percent to 1.8721.

The rally will come as a relief for Kiwi buyers as the exchange rate had reached its lowest level in a month at 1.8629 on Wednesday, amidst a soft start to the new year for the British Pound while the New Zealand Dollar simultaneously benefited from a strong bid.

The Kiwi retains a 'high beta' status - i.e. it is positively aligned to positive global investor appetite, rising alongside stock markets and commodity prices.

2021 is widely tipped by analysts to be a year of global economic recovery which has encouraged a strong rally in global equity markets and associated currencies such as the Australian and New Zealand Dollars.

"Financial markets are betting that the deployment of Corona vaccines will bring a return to economic “nor- malcy” in 2021 even though the virus is spreading rap- idly at the moment undermining mobility and trigger- ing more lockdowns world-wide. We share the optimism," says Bernhard Eschweiler, Senior Economist at QCAM Currency Asset Management AG.

Pound to New Zealand Dollar

Above: GBP/NZD has been trending lower since March 2020. For those looking for better money transfer rates, find out about how one company is offering a rate just 60 pips from the market rate.

How long this 'reflation' trade can continue could therefore be key to the New Zealand Dollar's outlook.

Some economists are now warning that following a bullish few months global markets are starting to look frothy and are increasingly prone to a correction, something which could weigh on Kiwi Dollar performance.

"The broad consensus that 2021 will be a year of normalisation seems likely to face a few speed bumps along the way. This would matter for the cyclical NZD exchange rate," says Adarsh Sinha with Bank of America Merrill Lynch in Hong Kong.

Sinha says the New Zealand Dollar is likely to be held hostage to external factors and economists at Bank of America Merrill Lynch are wary of a potential top in risk assets in the first quarter.

Economists at the investment bank flag indicators such as cash levels and global breadth that are closer to triggering a sell signal for 'risk on' assets, which could impact on the New Zealand Dollar's upward trajectory if realised.

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GBP/NZD Forecasts 2021

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Details: Consensus institutional forecast targets + max & min targets.
Contributors: Citi, Barclays, Morgan Stanley & more
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For the Pound-New Zealand Dollar exchange rate, how Sterling evolves will of course be key to the outlook for coming months.

There is a strong theme emerging amongst foreign exchange analysts the suggests the Pound will see a subdued start to 2021 as the UK battles with an aggressive resurgence in Covid-19, shuttering large parts of the economy in its efforts to stem the spread of the virus.

These actions have in turned knocked economic growth lower and economists are now saying the country is enduring its second recession in a year.

The prospect for the Bank of England to respond by cutting interest rates has risen accordingly, a repricing that has acted as a headwind for Sterling appreciation.

However, the UK Government is currently engaged in an ambitious vaccination project and seeks to have the most vulnerable injected with their first vaccination by mid-February.

This could ease pressure on the medical service and in turn allow for a more sustainable reopening of the economy, making for a more constructive 2021.

"We expect that the political turmoil around the negative impact of Brexit and lockdowns will subside fairly rapidly with the emergence of widespread vaccinations and rising global growth," says Thomas Flury, Strategist with UBS Switzerland AG.

Flury says that as confidence in the global economic recovery grows, the attractions of the pound will become more apparent.

"For instance, we think the recent rally of the pound signals that sterling is — and remains — an attractive diversification currency, one which rises along with the euro whenever investors want to unwind USD holdings," says Flury.

While the impetus appears to be for lower Pound-New Zealand Dollar exchange rates, should a genuine GBP rally emerge - as some analysts expect - a return to the higher levels witnessed in 2020 might transpire.

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