Pound / New Zealand Dollar Rate Could Slip to 1.8632 as Kylie Carries Kiwi Higher

• GBP/NZD risking further slide to 1.8632
• As NZD/USD buoyed by AUD/USD rally
• GBP subdued by uncertain BoE outlook

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The Pound to New Zealand Dollar rate extended a two-month downtrend early in the new week as the Kiwi was lifted in a rally by the Australian Dollar that could be set to place GBP/NZD under further pressure in the days ahead, which may see it trading down to 1.8632 or below.

New Zealand’s Dollar was the second best performing major currency on Tuesday when rising to more-than one year highs against Sterling, the U.S. Dollar and other currencies while the catalyst for the move appeared to be price action elsewhere on the antipodes.

“Despite being stretched, this NZD/GBP rally could extend slightly further,” warns Imre Speizer, head of NZ strategy at Westpac. 

The Reserve Bank of Australia (RBA) indicated in its April monetary policy statement that its interest rate could yet meet market expectations for it to be lifted repeatedly by year-end, leaving speculative sellers of the Aussie in a bind.

Above: Pound to New Zealand Dollar rate shown at daily intervals alongside NZD/GBP. Click image for closer inspection.

Bets against Australia’s Dollar had made up the largest ‘short’ position of any and all in the currency market early in the new year and in part because RBA policy guidance suggested that it would be late 2023 or beyond before the cash rate eventually begins to rise.

But with that guidance under review the Australian Dollar has rallied, lifting AUD/NZD - sometimes colloquially referred to as Kylie - sharply too.

“NZD/GBP is back above 0.53 [GBP/NZD back below 1.8867] this morning after a messy sort of a week. AUD/GBP has broken higher; that could pose upside risks for this cross,” says David Croy, a strategist at ANZ.

The Australian Dollar is the second largest part of the overall or trade-weighted New Zealand Dollar - with a weighting of 17.29% in 2022 - so rallies in the Aussie can lead to a larger overall depreciation for the Kiwi than would be the case in any instance where other currencies are rising.

Above: AUD/NZD shown at weekly intervals with Fibonacci retracements of August 2020 downtrend indicating possible medium-term resistances. Click image for closer inspection.

To the extent that the earlier levels reflected a happy equilibrium for the New Zealand Dollar, this Tuesday’s Australian Dollar rally may have, in theory, necessitated a simultaneous appreciation of the Kiwi against third party currencies like the U.S. Dollar in order to maintain or reassert that equilibrium.

While the AUD/NZD exchange rate rose on Tuesday it would almost certainly have risen further if NZD/USD hadn’t followed the closely correlated AUD/USD exchange rate higher, and it’s these price moves that led to the extended decline in GBP/NZD early in the new week. 

GBP/NZD tends to always closely reflect the relative performance of Sterling and the Kiwi when each is measured against the U.S. Dollar due to the greenback’s role as the market’s intermediary between third party currencies.

Similar is true of AUD/NZD and the performance of the Aussie and Kiwi relative to the U.S. Dollar.

Above: NZD/USD shown at weekly intervals with Fibonacci retracements of November 2021 downtrend indicating possible resistances for Kiwi. Click image for closer inspection.

“The NZD has performed well during the past month, as markets look to the 13 April RBNZ meeting and potential for a 50bp hike, as well as the commodity price trend. The latter will probably be a more enduring source of support for the NZD this year,” Westpac’s Speizer said on Tuesday.

Tuesday’s rally leaves little in the way of NZD/USD before it reaches the 0.7072 area and any further climb toward this level would be likely to place GBP/NZD under further pressure, potentially leading it to fall to 1.8632 or below. 

This would be especially likely if Sterling itself remains subdued in light of the uncertainty about the outlook for interest rates at the Bank of England (BoE), uncertainty which has grown further since the March monetary policy decision. 

“We continue to view Sterling being at risk due to a likely correction in what is priced into the STIR strip. We expect a moderation in UK rate expectations from the current near five hikes by November narrative,” says Jeremy Stretch, head of FX strategy at CIBC Capital Markets.

“A paring back in rate expectations should continue to encourage a lower GBP/AUD and GBP/CAD,” Stretch told clients on Tuesday, in anticipation of price moves that could also have implications for GBP/NZD too.

Above: Pound to New Zealand Dollar rate shown at weekly intervals with Fibonacci retracements of post-referendum recovering indicating possible medium-term technical support levels for Sterling. Click image for closer inspection.