Pound-to-New Zealand Dollar Week Ahead Forecast: Scope for a Recovery

🎯 GBP/NZD year-ahead forecast: Consensus targets from our survey of over 30 investment bank projections. Request your copy.

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The New Zealand dollar could face a setback from the RBNZ decision this week.

The pound to New Zealand dollar exchange rate (GBP/NZD) opened the week at 2.2633, having been as low as 2.2455 in the previous week with gains representing a paring of recent hefty losses.

The price action is closely associated with losses in GBP/AUD, but there are also several additional factors that have driven recent NZD outperformance, "namely the trend in the broad USD, strong NZ activity data and a commodity price rally,” say tacticians at HSBC.

Despite there being a strong bull case for NZD, we think the recovery can extend to 2.27 in the coming week on the basis that the RBNZ decision represents the chance to have a sober reset in New Zealand interest rate expectations.

The NZD rally suggests markets see an imminent RBNZ rate hiking cycle, similar to that underway in Australia. However, some analysts warn it would be wrong to translate Australia's fortunes directly onto the New Zealand setup.

"We pay particular attention to Canada and New Zealand where markets are pricing hikes, but our economists see additional rate cuts," says a note from Bank of America Global Research, released Feb. 10.

If this view is correct, a reappraisal of the notably bullish NZD rate expectations setup is possible; certainly, new RBNZ governor Anna Breman will need to confront the 'hawkish' repricing in rate expectations.

Does she verify those views and risk a young and vulnerable economic revival? Or does she push back, and keep a balanced guidance, saying rates will fall if the data warrants?

The latter looks the more plausible and if delivered would weigh on the kiwi.

Bank of America strategists "remain bearish NZD and recommend positioning via NZD put spreads ahead of the RBNZ."

The risk is that the RBNZ cautions against this, opting for a more balanced approach to policy, i.e. that it will cut interest rates again if warranted by the data. A more sober assessment would weigh on NZD and allow key pairs like GBP/NZD to recover some ground.

To be sure, the overarching setup is still negative, but it looks to us that risk-rewar favours a NZD setback at this juncture.

🎯 GBP/NZD year-ahead forecast: Consensus targets from our survey of over 30 investment bank projections. Request your copy.

Week Ahead Forecast (High Probability)

- Base case: recovery toward 2.27
- RBNZ decision key catalyst
- Hawkish validation caps recovery
- Balanced guidance likely triggers NZD pullback

Strategic Overlay for GBP/NZD Payments

Those needing to buy NZD (sell GBP) face near-term risk of an RBNZ-induced NZD setback and may benefit from waiting for a potential recovery toward 2.27. Those needing to sell NZD (buy GBP) should consider securing partial cover ahead of the RBNZ decision, as a dovish surprise could quickly lift GBP/NZD.

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