New Zealand has been in the headlines consistently because of its good management of the spread of the pandemic; by contrast, the UK has been in the headlines for the complete opposite.
It comes as no surprise then that shorting GBP against the NZD was a good trade all the way through to the final trade agreement between the UK and the EU at the very end of last year.
Since then GBP/NZD has been slightly choppier as the market tries to work out which way to jump on the sterling side of the trade and digests the impact of Brexit and the massive uptick in COVID cases in January. Technical analysis indicates there could be further downside in the GBP/NZD pair to come, despite the flattening of the 20 day moving average.
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China virus, US dollar putting pressure on Kiwi
Take the pound out of the equation and the NZD is still looking a little risk sensitive on its own merit. Some traders have been worried about news of further virus spread in China, still a major export market for New Zealand. The relative strength of the USD is also putting pressure on the NZD.
Most traders exposed to the New Zealand dollar seem to be trading against sterling or the greenback and both these currencies are delivering much more volatility at the moment, as the UK grapples with lock down and the US digests the after effects of the storming of its Capitol last week, plus investors wonder what sort of fiscal policy they will see under incoming president Joe Biden.
Reserve Bank continues to hint at rate cut
Looking at the fundamentals behind the NZD itself, there is further speculation about a potential central bank rate cut, plus there are lower NZ bond prices to consider. This means there could be some further downside in NZD in the near term which is going to mess with any medium to long term trends.
The country’s central bank – the Reserve Bank of New Zealand – has so far backed away from negative interest rates, but never say never. There is expectation that it will cut the NZ OCR by -15bps to 0.1% when it makes its monetary policy statement in May.
“This further cut may not prove necessary, but as things stand it makes strategic sense. If the housing market and domestic economy maintains momentum well into autumn, the RBNZ will not cut again at all,” says Sharon Zollner, chief economist at ANZ. “If COVID-19 returns to our shores in a significant way, a negative OCR will once more be game on.”
ANZ reckons the bank is going to try to keep any further loosening parked for as long as it can. Performance in the underlying NZ economy in Q1 is going to be critical, as it keeping a lid on the virus. House prices in New Zealand are picking up and analysts like BMO and Westpac are sounding very bullish on NZD/USD, which they are forecasting at 0.75 and 0.72 respectively in the course of 2021.
Finance minister Grant Robertson is also asking what the RBNZ can do about reigning in higher house prices, as a time when the bank is still a rate cut – the next few months could get interesting for the NZD.