The New Zealand dollar (NZD) has softened in mid-week trade bringing an end to its brief run of strength.

We have seen the GBP-NZD stabilise in the mid-week session following recent sharp declines.

At the time of writing the British pound to New Zealand dollar exchange rate (GBPNZD) is trading at 2.3607 on the inter-bank markets while high-street banks are quoting closer to 2.2946 for international payments.

Independent providers are seen quoting closer to the actual market rate at 2.3324.

The NZ to US dollar rate is meanwhile seen at 0.6580 having recovered from a recent low of 0.6509.

For the GBP-NZD the 2.40 level now forms a solid area of resistance beyond which the pair could struggle to advance.

This year's gains by the pound have been impressive but the rapid rate of the climb has encouraged many to question the sustainability of the up-move.

It would seem that the round figure of 2.40 proved a psychological barrier beyond which bulls got nervous.

Above: GBP/NZD hits a wall after strong gains. 2.40 now forms the obvious resistance zone.

New Zealand PM Expresses Concern Over Pace of Devaluation

“The true action on the market was in the kiwi which popped nearly a cent after Prime Minister John Key noted that the pair had fallen faster than expected. The kiwi has been in a near free fall for the past three months dropping more than 1200 points or 15% from .7700 to .6500,” says Boris Schlossberg at BK Asset Management.

The PM may be concerned that such a sharp drop could cause a spike in import prices and may prefer a more managed decline.

Still with commodity prices at a 13 year low and RBNZ expected to cut rates this Wednesday it's difficult to see kiwi gaining much upside traction suggests Schlossberg.

The pair could stage a mild dead cat bounce towards the .6800 figure, but unless RBNZ signals a pause in rate cuts after this week's meeting the rebound in the pair is likely to quickly lose momentum.

Lloyds Bank say, "The NZDUSD has bounced a little from recent lows, as shorts are pared back heading into the RBNZ meeting tomorrow, with high expectations of at least 25bps cut. .6665 is immediate resistance, with .6830-50 above. Support lies around .6400 ahead of .6200 which the RBNZ said was around historical fair value."

Another Rate Cut to Limit NZD Strength

Another RBNZ cut is expected to be delivered this week (Wednesday), but what will Wheeler say about NZD’s 15% decline?

This question has become all the more pertinent owing to Key’s recent comments.

The RBNZ is widely expected to cut its base rate by 25bp to 3.00%, which would be the second cut of an easing phase that began last month.

The arguments for the RBNZ to cut are straightforward says Greg Anderson at BMO Capital:

“Inflation has been tepid, with Q2 data coming in at only 0.3% YoY for Q2. Economic growth is decelerating and confidence is waning.

“Export prices have deteriorated substantially over the past quarter. The only thing that would give the RBNZ pause is the ongoing strength of the housing sector, but with cash buyers from abroad driving the frothiest activity, it is unlikely that RBNZ rate policy can do much to deter a bubble.”

The key issues for the FX are the forward guidance on future interest rate policy and then the whole FX discussion.

Money markets and the OIS curve have roughly 20bp more of rate cuts priced in for the 3 months following this week’s expected cut.

“If Governor Wheeler’s comments were to talk markets out of pricing in a third cut, then NZD could catch a bounce despite the rate cut. On the other hand, if Governor Wheeler hints that the RBNZ is on a path toward a 2.50% base rate over the next few months, then NZDUSD could collapse further,” says Anderson.

So this promises to be a wild week for the NZD, those with currency payments involving the currency should ensure their broker has the relevant buy and sell orders in place to catch any beneficial moves.