The pound to New-Zealand Dollar (kiwi) has lost a substantial amount of ground after the Reserve Bank of New Zealand (RBNZ) decided not to lower rates at their April rate meeting, reversing the short-term upside bias for the pair
On the charts, this resulted in a gap down in the pair, which fell to its current level in the 2.0960s.
This is just above a major down-trend line but just below a multi-month support level in the 2.0980s.
The weakness has brought the short-term up-trend into question, and although the pair still remains above the trend-line we reserve a neutral stance for the time being, and await further developments. As far as we are concerned, upside and downside pressures are broadly balanced now.
Expectations that the RBNZ would cut rates at their April meeting, failed to materialize, and this drove the kiwi higher.
The RBNZ kept their base lending rate or official cash rate as it is called at 2.25%, the highest in G10.
The policy direction remained tilted towards a cut in interest rates, however, after RBNZ governor Wheeler said:
“Further policy easing may be required to ensure that future average inflation settles near the middle of the target range."
The central bank also reiterated its concern that the Kiwi remained too strong and needed to fall to help exports and inflation.
Some analysts, such as ING’s Viraj Patel see the possibility of direct intervention on the horizon, as cut in the RBNZ base interest rate is unlikely to significantly weaken the New Zealand dollar, and achieve the bank’s goal.
One of the problems with cutting rates is it could continue to stimulate the already overheated property market which has seen house prices soar in Auckland, to levels which make it wone of the most expensive places in the world to live when measured as a ratio to average wages.
Brexit is the main theme for the pound, with the current focus on polls and whether they are showing a continuing widening lead for the Remain camp. The increasing lead up to now has caused a recovery rally in the pound.
It has been found that the large number of undecideds (15%+) would probably vote to Remain if forced to come down on one said or another. How the large undecided eventually vote is expected to swing the vote one way or another.
A report from the treasury about the consequences of a Brexit was highly negative seeing considerable risks to the economy. This, and President Obama’s admission that a replacement free-trade agreement with the US would not provide a quick fix, may have supported the stay campaign.
According to a research note from Unicredit’s Chief Global Economist Erik Nielsen, even without consideration for vacillating voters Remain’s lead has now extended to double digits and betting shops are placing odds of staying in the EU at over 70% (Ladbrokes currently offer 73% and Betfair 75%) - from under 64% previously. They are normally very accurate.
Some analysts are arguing that the April rally will not extend as there will always be some risk of Brexit until after the results have been published and so Sterling will always carry some weakness from that risk.
The recovery from the March lows at 1.38 presents about a 5.0% gain. According to UniCredit Brexit fears accounted for an 8% fall in price to 1.40. That translates into roughly 9-10% to 1.38. Overall, then, we can assume then that about a half of the Brexit fear premium has been recouped in the April rally.
This is admittedly a fairly substantial amount, and the lessening fear of a Brexit may be running out of impetus, after all there is always a risk of a success for leave right up until the last vote is cast.
Another factor in the pound’s rise, however, is increasing rate hike expectations:
“Interestingly, 12-month BOE rate hike expectations have firmed and the British Pound has traded higher even as UK economic data outcomes has deteriorated relative to consensus forecasts in recent weeks,” says Ilya Spivak, Currency Strategist at DailyFX.
According to a recent note from Capital economics, however, the assumption that Remaining in the EU will increase the probability of a rate hike are false, as if anything the rise in the value of sterling following a referendum win for the stay camp would place downwards pressure on inflation, by making foreign imports cheaper.
Data hotspots in the week ahead
The key data releases for the week ahead are Employment Change and the Unemployment rate from New Zealand, which currently stands at 0.9% in Q1 and 5.3% respectively.
For the pound the focus will be on PMI’s with Manufacturing, Construction and Services in April all released in the week ahead.