- GBP/NZD Extends Rebound With Probe Above 1.95
- But risk of reversal of post-Fed and BoE decisions
- Slip below 1.9200 possible if NZD/USD rebounds
Pine wood exported from Wellington, New Zealand. Photo by James Anderson, World Resources Institute.
The exchange rate between the pound and the New Zealand dollar has risen sharply from its lows in early April in recent weeks, but could risk falling back to the level of 1.92 or even below, following the Federal Reserve (Fed) and the Bank of England (BoE).
The pound fell near 2021 lows below 1.88 in the early days of April, but a stronger US dollar and growing risks to the Chinese economic outlook have since lifted the GBP/NZD pair higher from its anterior hollow.
The exchange rate between the pound and the New Zealand dollar rallied above the 1.95 handle on Tuesday, but is likely to come under pressure later in the week if the Fed postpones a tightening announcement. quantitative (QT) on Wednesday and if the BoE curbs the appetite for the pound sterling on Thursday.
“A 25 basis point hike is widely expected and slightly more than fully discounted for this week’s MPC meeting. We expect the pound to take its cue from longer-term rate expectations and dissenting member count indices in favor of unchanged rates and the message from the BoE’s long-term inflation forecasts, which are again likely to be below the market rate-based target,” said Adam Cole, chief FX strategist at RBC Capital Markets.
“SONIA futures are valued at nearly 200bp upside over the next year, which is well above our expectations. On the other side of a short GBP position, we smooth out the NZD underperformance in April. The NZD was the worst performing G10 of the month, although New Zealand rates markets did not participate in the price decline that affected some G10 markets. Short positioning in NZD is extreme compared to other commodity currencies,” Cole also said on Tuesday.
Above: British pound exchange rate against the New Zealand dollar shown at daily intervals with Fibonacci retracements of the February decline indicating possible areas of short-term technical resistance for the pound and support for the kiwi. Click on the image for a closer inspection.
Cole and the RBC team said the likely dampening effect of Thursday’s BoE decision could push the exchange rate between the pound and the New Zealand dollar back below 1.92 this week when they suggested on Tuesday that RBC clients sell the exchange rate and target a drop to 1.91 in the days and weeks ahead.
The BoE is expected to take the discount rate to a post-financial crisis high of 1% on Thursday, while many market participants expect the bank to also announce its intention to start actively sell government bonds acquired under its quantitative easing program in what would mark a further development of the quantitative tightening process in the UK.
But the potential spoiler for the pound is that a bond sales announcement is far from certain, if not somewhat unlikely, and the BoE’s economic forecast is likely to signal growing disagreement with market assumptions. regarding the outlook for the Bank Rate later this year.
This would contrast with the Reserve Bank of New Zealand (RBNZ), which has unabashedly telegraphed that the kiwi cash rate is likely to rise from 1.5% to over 3% in the year to come as part of its efforts to get inflation under control, after already lifting it by 0.75% so far in 2022.
“The RBNZ will release its Financial Stability Report today (10:00 p.m. London time). But the focus will be more on New Zealand’s Labor Market Report for the first quarter of 2022 (11:45 ),” says Carol Kong, strategist at Commonwealth Bank of Australia.
Above: NZD/USD displayed at daily intervals with Fibonacci retracements of the two respective April lower legs indicating possible short-term technical resistance areas to a rebound in the Kiwi Dollar. Click on the image for a closer inspection.
“Given that another 50 basis point rise in the RBNZ is already fully forecast for the end of the month, we do not expect the labor market report to induce a significant reaction from the NZD. From that, the NZD is likely to remain heavy on a strong dollar and lingering worries about the Chinese economy, Kong said on Tuesday.
While the spread of coronavirus containment measures in China is a headwind for the New Zealand dollar and other similar currencies, the Kiwi should also benefit much more than the pound sterling if the Fed’s decision on Wednesday reduces the US government bond yields and stalls the US dollar rally.
There is a risk of that happening as well, and it would happen just ahead of Thursday’s BoE decision, which is likely to include a significant ‘hawk’ surprise in order to rejuvenate the market’s appetite for the pound and avoid further declines in GBP/NZD. .
“NZD was sitting on minor support at 0.6460 yesterday; which has clearly broken and it is now at support at 0.6410 (the 123.6% Fibo extension of the January-April rally retracement),” says David Croy, strategist at ANZ, referring to NZD/USD .
“From a technical perspective, a break of 0.6410 is likely to move to 0.6335, but let’s see how the sentiment holds up. If the Fed defines aggressive short-term hikes as likely to limit the terminal rate, it could slow the USD’s ascent or reverse it,” Croy and colleagues also said Tuesday.
Above: NZD/USD displayed at weekly intervals with Fibonacci retracements of the 2020 rally indicating possible areas of medium-term technical support for the Kiwi Dollar and resistance for the US Dollar. Click on the image for a closer inspection.