New Zealand Dollar Tipped to Dominate Sterling Over Coming Days
The NZ dollar should continue to advance against the pound over coming days according to our analysis but there is one fundamental worry lurking in the background.
Last week's mild recovery by the pound against the NZ dollar has proven unable to hold and the exchange rate has started moving lower in line with our expectations.
Given the March recovery in GBP/NZD has only formed a three-wave a-b-c correction higher we remain concerned recent strength could merely be a correction within the dominant down-move.
The possibility therefore remains that the pair could capitulate and move lower again over coming days.
As such, a break below the 2.0841 'b' wave lows would confirm a move down to at least re-touch the 2.0623 February 26 lows:
New Zealand Dollar's Worry
Demand for NZ dollars comes alongside sustained growth in the economy and interest rates that remain higher than in other G10 countries.
However, we remain wary that a continuation of this trend is not guaranteed.
Desperately low dairy prices remain the Achilles Heel of the New Zealand economy, which would otherwise be fundamentally sound.
"Commodity prices in general are improving but Dairy does not seem to be able to join the rally, which is weighing on the NZD in the short term," say Tuatara Asset Management in a foreign exchange briefing to clients.
A fall in demand for western diary products from China is one major reason for the decline in dairy prices and if this continues it could weaken the New Zealand dollar further due to a fall in the country's trade balance accounts.
Latest Pound / New Zealand Dollar Exchange Rates
  | Live: 2.3123▼ -0.02%12 Month Best:2.3553 |
*Your Bank's Retail Rate
| 2.2337 - 2.243 |
**Independent Specialist | 2.28 - 2.2892 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
Upside in the NZD is also likely to be capped by the central bank which may cut rates again.
The last statement from the RBNZ (released after the RBNZ surprised markets and cut rates to 2.25%) suggested it might cut the interest rate further to 2.0%.
When central banks cut rates it weakens their currency as less international investors want to park their money in bank accounts in that country.
If interest rates are cut again, therefore, then the pound could gain traction higher, and the current indecisive correction might turn into a more protracted rally.
However, the pressure on New Zealand house prices could mean the RBNZ's hands are tied.
"NZ Migration surged to another annual record in February with a total of 67,341 net permanent people moving to NZ in the last year. This is by far the biggest gain in the country’s history and will place even more upward pressure on the housing market," say Tuatara.
Cutting rates again would only confirm the supply of cheap credit which would likely fuel what could soon become a housing crisis.
Economic Data to Watch for GBP
The one major obstacle holding sterling back against the kiwi dollar is uncertainty over the EU referendum, and with polls suggesting the vote may be even closer than previously thought the pressure on the pound is unlikely to ease any time soon.
Overall, therefore, the strong New Zealand fundamentals may give the kiwi an edge over the pound - particularly as the pound will be compromised for the period of the run up to the June 23 EU referendum.
There are some data points out of the UK that we will watch this week.
UK inflation - or CPI - is due out on Tuesday and is forecast to come out at 0.4% in February from 0.3% previously.
The previous three prints were positive.
Any upside surprise in UK inflation is likely to bolster the pound as it will increase the possibility of the Bank of England raising interest rates, which increases demand for the pound from international investors seeking the UK's higher interst rates from banking their money in UK banks.
UK Public Sector Net Borrowing for February is expected to rise to 5.4bn from -11.8bn previously. We don't see this headline release as being of particular concern to the currency.
Economic Data to Watch for NZD
New Zealand Data is unlikely to be market moving in the week ahead, with the Trade Balance for February, out on Wednesday March 23 the most significant data release.
Exports are expected to rise whilst Imports to remain the same leading to an increase in the Trade Surplus to 90m from 8m in the previous month.
If the data exceeds expectations the New Zealand dollar will probably rise and we will be keeping an eye on the event.
