- GBP/NZD stronger at start of week
- But ultimately still towards bottom of recent range
- NZ vaccination rate slows down
- Concerns that key target thresholds won't be met
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- GBP/NZD reference rates at publication:
- Spot: 1.9560
- Bank transfers (indicative guide): 1.8876-1.9013
- Money transfer specialist rates (indicative): 1.9385-1.9460
- More information on securing specialist rates, here
- Set up an exchange rate alert, here
The Pound-to-New Zealand Dollar exchange rate (GBP/NZD) is firmer at the start of the new week although it still remains closer to the bottom of its recent ranges than it does the top.
Gains come amidst a broad bout of broad based Sterling strength which is most likely linked to an ongoing move by money markets to price in a Bank of England interest rate rise in early 2022.
Upside in GBP/NZD will however most likely be limited over coming days given expectations for higher interest rates at the Reserve Bank of New Zealand (RBNZ) also remain elevated, even if there are emerging concerns regarding the domestic Covid vaccination programme.
"Still range trading – for now. Both central banks will hike soon (with the RBNZ leading) but that’s all pretty well priced in now," says Brian Martin at ANZ Research.
ANZ's analysts identify support for NZD/GBP at 0.4930, 0.5000 and then 0.5100.
Resistance is located at 0.5175 and 0.5215.
Flipping this over to give the GBP/NZD perspective, resistance to gains is therefore identified at 1.96, 2.0 and then 2.0283.
Support for weakness in GBP/NZD is therefore identified at 1.9175 and 1.9323.
Above: The various resistance (purple) and support (red) levels identified by ANZ.
FX transfers: Secure a retail exchange rate that is between 3-5% stronger than offered by leading banks, learn more. (Advertisement).
The New Zealand Dollar ended the previous week just above 0.70 against the U.S. Dollar and Martin says price action largely mirrored moves seen in AUD and EUR, with USD sentiment dominating as markets get ready for the Fed to taper and eventually hike rates.
He says this will in turn, seen U.S. bond yields rise to 3-month highs.
"Locally, it is all about the Delta outbreak, which remains front and centre, with no major data scheduled between now and next week’s RBNZ OCR decision," says Martin.
He says while the outbreak is contained, case numbers are no longer trending down and that could weigh on New Zealand Dollar sentiment, even with the RBNZ likely hiking anyway as it tries to “look through” lockdowns to the eventual rebound.
"But things could certainly be going better," he says.
"This Delta outbreak is teaching us that the future will look different to the Level 1 business as usual we have become accustomed to. We have – hopefully – got on top of this latest outbreak. But not without a considerable toll on businesses and people’s wellbeing," says Nick Tuffley, Chief Economist at ASB.
New Zealand authorities have relaxed containment measures in Auckland already, despite ongoing signs of community transmission of Covid-19.
This is a potential signal that the government has given up on its elimination strategy, although concerns are now being sounded that vaccination rates have slowed sharply of late.
Just 144K people had a first dose of the vaccine in the last week, a notable drop from 387K people in the first week of September.
The slowdown in vaccination rates would be a concern if the Delta variant spread accelerated as lockdown conditions are eased as experience elsewhere in the world suggests hospitals could rapidly fill.
64% of the New Zealand population have had a first dose, a figure just below the US’ first dose rate and well-below that of countries like the UK and Portugal.
The Government has indicated that it wants vaccine rates of around 90% of the eligible population reached, which is around 77% of the full population.
Modeller Shaun Hendy has suggested that to keep deaths in the double-digits the Government would need to reach 90% of those aged five or over in order to reach 85% of the full population.
Therefore, if New Zealand's vaccination rate is already peaking the country's Covid outlook could take a turn for the worse at some point in coming weeks.
The downside risk for the New Zealand Dollar is that harsh restrictions are reimposed forcing the Reserve Bank of New Zealand to step back from its interest rate hike cycle.
Given the New Zealand Dollar has benefited of late from expectations for higher interest rates it stands that a reversal of these expectations would weigh.
For now the Pound looks to be the dominant partner in the GBP/NZD pairing.
The British Pound picked up some buying interest at the NZ$1.9863 low reached last week thanks to the Bank of England which effectively endorsed market expectations for an interest rate rise to take place in the early part of 2022.
Above: GBP was the best performer on Sept. 27.
Market expectations have built during the course of recent months that rising UK inflation levels and a stronger-than-expected labour market would induce the Bank of England into a rate rise in 2022.
But market expectations have firmed further for an early 2022 hike after the Bank said last Thursday that "some modest tightening of monetary policy over the forecast period was likely to be necessary to be consistent with meeting the inflation target sustainably in the medium term."
"Some developments during the intervening period appear to have strengthened that case," the Bank said in a Statement.
The Pound rose on the day as UK bond yields rose to reflect expectations for interest rate rises, but the rub for Pound Sterling bulls is that yields also rose in Germany and the U.S. at the end of the previous week as investors saw higher central bank interest rates elsewhere too.
This is particularly the case with New Zealand where the RBNZ is one of the central banks leading the race to lift interest rates, in turn bestowing upside support to the New Zealand Dollar.
However, there is certainly some buying interest in the Pound at the start of the new week suggesting some of the rates story specific to the UK continues to feed through.
Should this continue over coming days, and concerns over the NZ vaccination strategy arise, a recovery towards the top of the multi-week trading range becomes likely.