GBP/NZD Exogenous Analysis
- The UK and New Zealand Current Account Differential
The current account differential between the UK and NZ is the value of the subtraction of the NZ current account balance and the UK’s current account. For the GBP/NZD pair, if the current account differential is positive, it means that the UK has a higher current account balance than NZ. Thus, the price of the GBP/NZD pair will increase. Conversely, if the differential is negative, NZ has a higher current account balance than the UK. Theoretically, this means that traders would be bullish on the NZD; hence, the GBP/NZD pair price would drop.
In Q3 2020, NZ had a current account deficit of $2.48 billion while the UK a deficit of $20.97 billion. This means that the current account differential is -$18.49 billion. Thus, we assign a score of -5.
- The interest rate differential between the UK and New Zealand
The interest rate differential for the GBP/NZD pair is the difference between the UK and NZ’s interest rate. Carry traders and investors would direct their money to the currency, which offers higher interest rates. Therefore, if the interest rate differential for the GBP/NZD pair is positive, it means that the UK offers a higher interest rate than NZ. Hence, traders will be bullish on the GBP/NZD pair. Conversely, if the interest rate differential is negative, it means that NZ has a higher interest rate than the UK. This means that traders would be bearish on the GBP/NZD pair.
In 2020, the Reserve Bank of New Zealand cut its official cash rate from 1% to 0.1%, while the BOE cut the interest rate from 0.75% to 0.1%. In this case, the interest rate differential is 0%. Thus, we assign a score of 0.
- The differential in GDP growth rate between the UK and New Zealand
This differential shows which economy is expanding faster between the NZ economy and the UK economy. Comparing domestic economies using their GDP growth rates is more effective than using absolute GDP figures since they vary in size.
If the GDP growth rate differential is negative, the NZ economy is growing faster than the UK economy. This would result in a bearish trend for the GBP/NZD pair. Conversely, the pair will have a bullish trend if the differential is positive since it would mean that the UK economy is expanding more than the NZ economy.
The first three quarters of 2020 saw the NZ economy expand by 0.4% and the UK contract by 5.8%. In this case, the GDP growth rate differential is -6.2%. Hence, the score of -4.
Conclusion
| Indicator | Score | Total | State | Comment |
| The UK and New Zealand Current Account Differential | -5 | 10 | A differential of – $18.49 | NZ has a lower current account deficit than the UK. |
| The interest rate differential between the UK and New Zealand | 0 | 10 | 0.00% | The 0% interest rate differential is expected to persist in the short-term. That’s because neither the RBNZ and the BOE have scheduled changes in the monetary policy |
| The differential in GDP growth rate between the UK and New Zealand | -4 | 10 | -6.20% | New Zealand’s economy expanded by 0.4% in the first three quarters of 2020, while the UK contracted by 5.8% |
| TOTAL SCORE | -9 |
GBP/NZD exogenous factors have a cumulative score of -9. It means we should expect a continued downtrend in the pair for the short term.
In the above image, we can see that this pair’s weekly chart trading below the 200-period MA for the first time since August 2019. Cheers.
