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The Pound to New Zealand dollar exchange rate (GBP/NZD) risks further losses in the coming days amidst a shift in sentiment towards the Kiwi.
Last week's Reserve Bank of New Zealand (RBNZ) policy update convinced markets that the rate cutting cycle in NZ had ended.
The pound to New Zealand dollar (GBP/NZD) responded by dropping 0.80% on the day, having posted a new ten-year high at 2.3552 just 24 hours prior.
The subsequent fall from that peak has been impressive, and GBP/NZD has dived below both the 21-day and 50-day exponential moving averages (EMA).
This signals a potential blowout top in the multi-month rally and shift in momentum from the upside to the downside, opening the gate to 2.2806 later in December.
During the coming week we could see GBP/NZD stabilise following last week's falls and levels around 2.31 are our preference. But for now, we suspect any periods of consolidation will give way to further selling as investors account for a multi-month spell of settled New Zealand interest rates.
"The RBNZ delivered a 25bp reduction in the OCR to 2.25%. However, both wholesale interest rates and the NZ dollar rose following the meeting and especially following the postmeeting press conference," says Darren Gibbs, Senior Economist at Westpac.
Kiwi dollar strength reflected a greater sense of confidence in the economic outlook at the RBNZ than markets had expected, prompting investors to bet the cutting cycle has ended.
"Shifts in local rates markets following strong Australian monthly inflation data and a hawkish rate cut by the RBNZ have also helped the Antipodean currencies, leaving investors considering when the RBA and RBNZ cutting cycles will turn into hiking cycles," says Crédit Agricole.
History tells us that the lag between a cutting cycle ending and hiking cycle beginning puts both the RBA and RBNZ on course for a hike by the end of 2026, sooner than many peer central banks.
This means monetary policy could shift from being a headwind to a tailwind for NZD.
"The median turnaround from cuts to hikes for the RBA is about the same at 10 months, but for the RBNZ it is a bit longer at 16 months. So late 2026 for rate hikes looks like the earliest timing, according to history, which is consistent with our current views," says Crédit Agricole.
Above: There's been a decisive shift higher in the outlook for NZ interest rates. And this is underpinning the NZD.
Elsewhere, currency strategists at Citi, the world's largest prime FX dealer, say the NZD’s depreciation should now stabilise as markets see the RBNZ’s easing cycle ending, interest rates turning higher.
At the same time, the currency is looking "grossly undervalued" against the USD, with NZD/USD expected to hold above 0.55 and rebound toward 0.59.
The big risk for the NZD in the week ahead lies with U.S. data, which will determine the broader investor sentiment as NZD benefits when markets are in a positive mood.
"US ISM and core PCE data will also impact the Antipodean currencies in the coming week. The market has moved to aggressively price a Fed December rate cut weighing on the USD, which could easily reverse if the US data turns positive," says Crédit Agricole.
The market is priced for a December interest rate cut, which has supported risk sentiment of late, and the Kiwi by extension.
Should the data encourage those bets to build even further, then the NZD can end the coming week higher than where it started.