Pound to New Zealand Dollar: Outlook for the GBP/NZD in the Coming Week

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The short-term trend in the GBP to NZD exchange rate is higher and our studies show there is little sign of the move abating in the week ahead.

The New Zealand dollar was the worst performing G10 currency in the week past.

"NZD comes bottom, dragged lower by a dwindling yield premium over the US - it's down to 74bp at 10years, the lowest since July 2006. The market is split about the June RBNZ meeting, but does expect a further cut in rates this year," says Kit Juckes, analyst at Societe Generale.

With regards to the outloook, the GBP/NZD charts are showing that a break above the 2.2003 highs would reassert the up-trend and probably lead to a continuation to 2.2150, just below the 200-day moving average (MA) at 2.2020.

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The kiwi has recently lost ground after a warning from New Zealand’s national dairy cooperative, Fonterra, that the currency was too strong and was making it difficult for New Zealand dairy farmers to export their goods at competitive prices.

This heightened expectations the Reserve Bank of New Zealand (RBNZ) might cut interest rates in order to weaken the currency. Lower interest rates are overall negative for a currency as they attract less foreign capital due to the lower expected returns.

Reports the government and RBNZ might be about to introduce more macro-prudential policies to cool the overheating housing market, which has made Auckland the most expensive place in the world to live based on the ratio of average income to average house price.

The housing market has put pressure on the RBNZ to increase interest rates to reduce borrowing, however, if macro-prudential policies are introduced to tighten lending criteria, these will do the job of higher interest rates, freeing up the RBNZ to cut rates if it needs to.

Any more reports on housing policies in the week ahead, therefore, would be likely lead to the New Zealand dollar weakening further.

Analysis of the Pound

The main event for sterling will be the triumvirate of purchasing manager surveys (PMI’s) released, including Manufacturing, Services and Construction.

The fall below 50 in manufacturing PMI in the previous month of April was a particularly negative sign, which shows that the manufacturing sector is contracting (over 50 = expansion; under 50 = contraction).

If PMI’s for May continue to show weakness this will probably weigh on the pound because it will lower the possibility that the Bank of England (BOE) will raise interest rates sooner than expected. 

Higher interest rates support a currency as they increase capital flows into the country due to the higher return offered.

Some analysts have argued that the fall in PMI’s is as a result of Brexit fears, which have contributed to a fall in direct foreign investment. If they are right then PMI’s should bounce back if the referendum vote returns a Stay win, as bookmakers still probably expect.

If PMI weakness is not due to Brexit concerns, however, then Economist Roger Bootle, argues it could substantially delay interest rate expectations, as PMI’s are currently at such a low level which, “in the past has often triggered interest rate cuts from the MPC.”

Latest Referendum news

The latest Brexit polls have been highly mixed, with yesterday’s YouGov poll showing a close race between ‘Stay’ and ‘Leave’, but a poll published overnight by Lord Ashcroft revealing over 60% of people still expect the Remain camp to win.

The Ashcroft poll also shows most people say they are likely to base their final decision on “gut feel” rather than “facts and figures”.
We think this may result in a higher-than-expected vote for ‘Leave’, as its more emotive, reactionary, and patriotic political associations, which are generally viewed as more ‘instinct’ driven than ‘rational’.

Whatever the polls are saying the race is likely to be close run, and the result unknowable until the day after the actual vote.