British Pound / New Zealand Dollar: 1.84 Provides Initial Downside Target

The GBP to NZD conversion faces further downside as the allure of New Zealand interest rates are tipped to keep the NZ dollar well bid.

The Pound to New Zealand dollar (GBP/NZDi) exchange rate is likely to see more downside in the immediate future as investors prepare the sandbag defences for another central bank stimulus blitz.

The next meeting of the Bank of England (BOE) on August 4, is now highly likely to include a cut in the base lending rate to 0.25%, and also a rise of circa 50bn a month in asset purchases as the Burgermiesters of Threadneedle Street crank up their printing presses and start feeding the rolls in.

This will almost certainly depreciate the Pound as stimulus measures invariably lead to a dilution in unit value by increasing supply.

Any question marks about whether the BoE is ready to cut rates must face the now 97% probability that it will, according to market interest rate swaps, a financial gewgaw used to give a very quick and dirty idea of the likelihood of central banks changing interest rates.

Currencies respond correlatively to interest rates in the modern world of trans-border global capital flows, as investors seek out the country’s which offer them the highest returns.

Compare the UK’s 0.5% return to New Zealand’s 2.25% and you can see why the direction of the flow is down-under.

Indeed this goes for most of the G10: the Eurozone will pay investors nothing, the US little more at only 0.5% - almost all have interest rates significantly below New Zealand’s comparatively Shylock-like returns.

This ultimately provides a constant demand for New Zealand debt which ultimately keeps the value of the NZD high – some would say too high.

Latest Pound / New Zealand Dollar Exchange Rates

	Live: 2.3109▼ -0.08% 12 Month Best: 2.3553
*Your Bank's Retail Rate	2.2323 - 2.2415
**Independent Specialist	2.2785 - 2.2877 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

Analysts at BNZ bank believe that the relatively high value of the kiwi has become an issue for the Reserve Bank of New Zealand (RBNZ) which would prefer a lower exchange rate in order to keep New Zealand exports competitive.

July's economic update from the RBNZ referenced an alternative scenario from its June Monetary Policy Statement.

"This suggested that if the NZ TWI (the broad measure of the NZ exchange rate) simply failed to fall from its June level, the Bank might need to cut the OCR to below 1%," says Stephen Toplis at BNZ.

As a result, the market is now primed for an OCR cut from 2.25% to 2.00% on 11 August. 

BNZ also anticipate the OCR will be cut again to a trough of 1.75%.

However even if the RBNZ prune back New Zealand's rate advantage to 1.75%, it remains likely the Pound will fare far worse than the kiwi if both central banks press the button in August, since the UK interest rate will be reduced from 0.5% to 0.25%; and this bodes negative for GBP/NZD.

Charts Betray Bearish Conditions, 1.84 First Obvious Target

The application of indicators to price charts is known as technical analysis, and can also provide some illuminating insights into the future course of currency rates.

In the GBP/NZD pair, the main feature is that the rate has broken below a key trend-line for the recent recovery.

This is a very bearish indicator and signals more downside to follow.

There is a strong probability that from here on the pair will continue lower, further compounded by the fact that the peaks and troughs of price action have also now started to escalate lower from thw 1.9000 peak.

A move below the previous 1.8530 lows is likely to lead to a continuation down to the next target at the 1.8400 round number level -  possibly even lower in time.

The MACD momentum indicator in the bottom panel supports this bearish take on the pair as it has now moved below the zero-line distinguishing up-trend from down-trend.