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Leading Investment Bank Forecast UK Pound-New Zealand Dollar Rate at 2.0 by End of 2021

March 28, 2021 by Sanya Dot

The New Zealand Dollar is forecasted to weaken modestly in the short-term. At Barclays, foreign exchange analysts predict that the NZD trend will lower over the year because of headwinds faced by the RBNZ and uncertainty on the country’s economic recovery.

The UK-based global investment bank, on the other hand, expects the British Pound to remain supported. This ensures that the Pound-to-New Zealand Dollar exchange rate (GBP/NZD) maintains a gentle upward bias over coming months.

“NZD appreciation on better growth and risk sentiment has likely run its course, in our view,” says Ashish Agrawal, an analyst with Barclays.

He adds that NZD risk premia could climb as New Zealand’s recovery remains uncertain, given the lack of support from tourism and reduced fiscal support.

Uncertainty over New Zealand’s economic recovery was laid bare on March 17 when Statz NZ reported its economy declined by 1.0 percent in the final quarter of 2020. This outcome surprised analysts and the market, which highlighted headwinds facing the economy despite the absence of domestic lockdown measures.

“We also expect markets to scale back and push out normalisation expectations as RBNZ leans against market pricing and effective macroprudential measures support retaining a dovish bias,” says Agrawal.

NZD dropped against all its peers on March 23 after the government announced a series of measures to cool the housing market. The pressure on the Reserve Bank of New Zealand (RBNZ) to raise rates has diminished.

The government announced plans including the phasing out tax relief on interest payments and extending the bright-line test which effectively brings more existing homes into scope for capital gains tax.

The market is betting that the government’s new aggressive move to cool the sector gives the RBNZ a pass at raising rates. It can sit on a lower-for-longer rates policy, which in turn takes some support away from the NZ Dollar.

The GBP/NZD exchange rate rose 1.40% in the wake of the decision and is now 2.0% higher on the week at 1.9732.

Meanwhile, the NZD/USD exchange rate fell 2.10% following the decision and is down 2.50% on the week at 0.6979.

Following the government’s decision expectations for a RBNZ rate hike dropped significantly according to money market pricing. Investors moved to price out the possibility of a shift to a more hawkish stance in the next year with the aim of curbing the housing bubble.

The RBNZ continues to pursue a programme of quantitative easing which sees it expand its balance sheet by buying New Zealand government bonds. In turn, it surpasses the yield paid on those bonds and keeps a lid on the cost of finance throughout the economy.

“The RBNZ continues to expand its balance sheet and the NZD is at risk from unwinding by foreign investors who hold NZD40BN of bonds,” says Agrawal.

Trade dynamics are cited by Barclays as likely to be relatively unsupportive.

“The current account deficit is also expected to widen, given stronger imports and no tourism revenue,” says Agrawal.

The RBNZ expects a deficit of 2.8% of GDP in 2021-22 versus 1.3% of GDP in 2020-21.

Barclays analysis shows that the current valuation of the NZ Dollar to be also relatively unsupportive. They also added that the RBNZ could express discomfort with NZD strength if the currency happens to rise further above the RBNZ’s revised path.

Filed Under: Financial Markets

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