October 16, 2023 - Written by Frank Davies
STORY LINK Pound to New Zealand Dollar Forecast: GBP/NZD Slides from 3-Week Best
The Pound to New Zealand Dollar exchange rate (GBP/NZD) hit 3-week highs near 2.0660 on Friday amid risk aversion. The New Zealand election result and hopes for Chinese support measures triggered a reversal on Monday with GBP/NZD sliding to test the 2.0500 area.
Crucial GBP/NZD support does not emerge until the 2.0275-2.0300 area.
In the weekend general election, the National Party posted significant gains with 50 seats while its preferred coalition partner ACT won 11 seats.
This would give the parties a slight majority in parliament, although postal votes have not yet been counted.
Ahead of the election, National pledged to restore the central bank’s mandate to focus entirely on inflation, dropping the maximum employment component and potentially also removing the housing stability objective.
According to ING; “The first – and more impactful – effect would suggest higher RBNZ rates in the medium and long term; while removing housing affordability objective would in theory be a dovish argument, the stricter inflation target would likely overshadow any housing-related considerations.”
A tougher stance would tend to support the New Zealand currency.
Shorter-term economic data is likely to be more important with the latest inflation data due for release on Tuesday.
Consensus forecasts are for a 1.9% third-quarter increase with the year-on-year rate at 5.9% from 6.0% previously.
According to ANZ; “Although there were elements of surprise in the election result, it broadly matched polls, and the strong result for the opposition removes a source of uncertainty, coalition talks notwithstanding. Q3 CPI is out today; it’ll be key for the RBNZ, and by extension, short-end rates and the Kiwi.”
ANZ looked at the technical outlook; “The Kiwi hasn’t quite mapped out a triple-bottom, but it came close (the early Sep low was 0.5859, the early Oct low was 0.5871, and Friday night’s low was 0.5884), and the technical outlook will sour if it makes a new cycle low.”
As far as the inflation data is concerned, Credit Agricole expects volatility in the food and energy components. In this context, it noted; “Given the one-off impacts of changes in government duties and the volatility of food and energy prices, investors should focus more on the RBNZ’s core measures of inflation, especially its sectoral factor gauge of inflation.”
It added; “The NZ inflation data will likely reinforce the RBNZ remaining on hold and potentially see the market more aggressively price in another rate hike by the RBNZ. The market is about 65% priced for another 25bp hike, so an upside surprise in inflation would give the NZD a lift.”
Commonwealth Bank of Australia strategist Carol Kong considers that interest rates have peaked; “NZD risks remain skewed to the downside in our view. The interest rate support for NZD has faded as we expect the RBNZ to keep the OCR unchanged until early 2025,”
Kiwi Bank senior economist Mary Jo Vergara added; “We don’t expect further tightening from the RBNZ. Inflation is still high, but we see it continuing to decelerate. And there’s clear evidence that the labour market is loosening rapidly.”
The Chinese outlook will also be important for the New Zealand and Australian currencies.
According to MUFG, “The authorities see the risks stemming from weak demand given current near deflationary conditions and are set to continue with more direct policy support.”
It added; “Forecasts for economic growth this year have already started to be revised higher in recent weeks moving back in line with the government’s target of 5%.”
MUFG expects that the Australian dollar will gain more than the New Zealand currency from Improving Chinese sentiment.
It also expects yield spreads will be important and added; “Short-term yield spreads have remained more stable over the past month even as AUD/NZD has moved lower suggesting that the pair has overshot to the downside in the near-term.”
Overall, MUFG recommends buying the Australian dollar to New Zealand dollar (AUD/NZD) exchange rate at 1.0680 with a target of 1.0830.
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TAGS: Pound New Zealand Dollar Forecasts