A ‘stale’ monetary climate in the UK coupled with an overvalued New Zealand Dollar could push the GBP/NZD conversion higher says CIBC Markets' Jeremy Stretch.
Back Sterling against the NZ Dollar says foreign exchange strategist Jeremy Stretch at CIBC Capital Markets in London.
Justifying the call Stretch says he sees strong UK economic data combined with less dovish commentary from the Bank of England (BOE) as drastically reducing the chances of more monetary easing.
Easing is negative for a currency as it keeps interest rates low which detracts foreign investment since investors prefer higher returns.
“With UK activity data holding up relatively well, retail spending looks set to remain firm into year-end, underlines that amidst monetary policy inertia we can expect increasingly stale GBP short positions to be covered,” says Stretch.
Whilst previously advocating buying GBP/USD Stretch now sees the Dollar as too risky a proposition given its recent strength.
Instead, he sees the New Zealand Dollar as the perfect partner for the Pound to appreciate against.
“In terms of the NZD the ongoing deterioration in the terms of trade, export prices have fallen for four straight quarters, underlines ongoing macro headwinds,” says Stretch.
The previously overheating housing market is now also “deteriorating,” whilst the central bank is not supportive of the currency at its current levels, seeing it as overvalued.
Pressure may, therefore, begin to grow for the authorities to ease policy to bring down the value of the Kiwi.
New Zealand exports are also less likely to appreciate due to the rise in global commodity prices which is already happening on the back of expectations of increased infrastructure spending in the US as well as stockpiling by China in advance of a possible trade war with the US.
Stretch recommends buying GBP/NZD above 1.7807 (the 100-day moving average) with an upside target at 1.8625, and a stop on a close below 1.7620.