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The pound is rising against the New Zealand dollar, but midweek the Reserve Bank of New Zealand is a risk.
The pound to New Zealand dollar exchange rate rises to 2.3066 on Tuesday, the highest level seen since May 05.
That speaks of a building near-term rally that sees the pair cross the 21-, 50- and 200-day moving averages, confirming technical momentum is now evolving in favour of expecting further gains.
On technicals alone, GBP/NZD is set for a constructive week ahead and should test 2.31.
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But, understanding what's driving the move is important, and hints at the need for caution.
NZD weakness is interesting as it already defies supportive fundamentals: the NZD is the second-biggest loser in May despite supportive global risk dynamics that see U.S. stock markets hit new records on a near-daily basis and a 7% fall in oil prices on Monday.
The NZD is considered a high-beat currency and would typically do well under such conditions.
Further screening suggests the underperformance is instead linked to interest rate dynamics, which are in turn linked to central bank developments.
We note the policy-relevant NZ 2-year bond yield has dropped quite sharply of late and the fall is outpacing the fall in yields seen in other major economies.
It tells us that investors are paring back expectations for the number of RBNZ rate hikes that lie ahead at a faster rate than they are doing for other central banks.
That also tells us that investors are positioning for a relatively 'dovish' tilt coming from Wednesday's RBNZ decision.
The central bank is expected to keep the Overnight Cash Rate unchanged, meaning the market will be looking for the central bank to update its thinking on the prospects for a July and/or September rate hike.
Above: NZD performance on a one-month view.
The obvious risk for currency markets is that this recent softening in rate hike expectations runs up against a RBNZ that is determined to ensure inflation expectations don't run away and is therefore willing to raise interest rates.
Economists at Westpac reckon the central bank will raise its own interest rate forecast by around 20bp to around 3.2%, reflecting higher inflation expectations.
"We remain comfortable there will be three 25bp hikes by year-end," says Westpac in a preview note.
If that many hikes are delivered, the RBNZ will necessarily indicate that the market should expect action in the coming months.
That could prove supportive to the NZ dollar and help it reverse recent declines.
Consensus projections for the next four quarters based on our survey of the world's tier-1 investment banks.
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