Pound / New Zealand Dollar Forecast for the Coming Week

Investor appetite for "carry" has kept the pound to New Zealand dollar exchange rate under pressure ensuring this is one of the worst-performing Sterling pairs following the Brexit vote.

The Pound to New Zealand dollar exchange rate (GBP/NZD) has slid down below the post-Brexit lows as sterling weakness combined with increased ‘carry’ has weighed on the pair more than most other sterling pairs.

‘Carry’ describes a type of trade in which investors borrow money in a low yielding currency such as the euro in order to purchase a higher yielding currency such as the New Zealand dollar.

They then pocket the difference in the interest they have to pay for borrowing and the interest they earn from lending. Which in this case would be roughly 2.25%.

From a technical perspective the pair may look oversold on the charts, but given a complete absence of signs it is going to reverse and go higher, the dominant bearish trend is likely to continue.

Tough support does not really kick in until 1.7715 where historic support and resistance combine with the S1 monthly pivot to produce a double layer of support, which is almost certain to elicit a bounce, if the exchange rate can actually get there.

A golden cross, signalled by the 50-day moving average crossing the 200, at the start of June, is a medium-term bearish signal.

With yields likely to remain low in most of the G10 investors are likely to want to push more money into G10 high yielders such as New Zealand and Australia, increasing, if anything, the attractiveness of the kiwi over alternatives.

This should further propel the trend down in GBP/NZD, and we see risks definitely skewed to the downside.

Assuming the pair can just breach 1.85, then a fall to 1.80 is definitely a possibility, followed by a move to the double support layer at 1.7715 subject to more bearish confirmation.

Latest Pound / New Zealand Dollar Exchange Rates

	Live: 2.3114▼ -0.06% 12 Month Best: 2.3553
*Your Bank's Retail Rate	2.2328 - 2.242
**Independent Specialist	2.279 - 2.2883 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

RBNZ Rate Cut in August?

The Reserve Bank of New Zealand (RBNZ) policy strategy is balanced on the horns of a dilemma.  

Recent New Zealand data, which has been quite positive, combined with the continuing house price bubble and constant immigration are three major factors against the RBNZ cutting rates below their current 2.25% level.

Whilst an overvalued New Zealand dollar and falling exports, especially in the country’s key dairy sector are factors yelling out for a rate cut.

Strategist Hans W Redeker of Investment Bank Morgan Stanley, sees the RBNZ’s predicament as resolving itself in favour of a cut in August:

“We believe that the RBNZ will continue to face the divergent effects of rising house prices (pushing it to keep rates on hold or raise them) and a too strong exchange rate (forcing further easing). With the NZD TWI at 1 year highs (and well above their forecasts), we are looking to sell the currency as the central bank appears ready to act.”

Redeker and his team point to up-and-coming inflation data as key in determining the outlook for RBNZ policy going forward:

“2Q CPI released in July is the next major data point to watch and weak print could solidify the odds of a cut in August.”

A cut to the UK interest rate would help reduce the demand for NZD in terms of the 'carry trade' we mentioned earlier.

If international investors see less return on any NZ investments they may avoid tranferring funds into the country.

This would result in less upside pressure on the NZD.

However, with the of the Bank of England likely to cut rates twice in 2016, the gap between UK and NZ interest rates that favours the carry will remain sizeable.

We therefore find it hard to argue against the NZD based on RBNZ rate cuts.

BNZ Upgrade NZ Dollar Forecasts

At the start of the new week we get news from BNZ bank who have told clients they are upgrading their forecasts for the NZD.

Analysts say they are upgrading their NZD outlook as they come to terms with their forecasting models being prone to underestimating strength in the currency over the course of 2016.

The NZD has traded near the top (and even beyond at one stage) the 0.67-0.72 range against the US Dollar that BNZ  forecast for the short-term - and that was assuming a “Remain” vote in the UK referendum.

Despite being wrong on the UK referendum vote, a negative-NZD outcome, BNZ are putting through some
forecast upgrades, with a year-end target of USD0.66 now (previously 0.63) and NZD/AUD at 0.94 (previously 0.91).

"Essentially it’s a level shift up to our previous profile, extending out to the end of 2018," say BNZ.