The pound sterling is on the rise and appears to have broken above a key level which may advocate for further advances.
- "Our recent bullish expectation for NZD was proven wrong quickly as the stop-loss at 0.6910 was taken out." - U.O.B on NZD/USD exchange rate.
- The expectation on GBP/NZD is that the breakout will hold and the pound will continue higher
The pound to New Zealand dollar is breaking out of a long-term descending channel, potentially signalling a change in the medium-term trend.
Oil prices remain firm and are seen hitting new highs, something that has offered a further boost to commodity FX, of which the New Zealand dollar is classed.
Nevertheless, in trade weighted terms the NZD has so far lagged the rebound recorded by its Australian and Canadian cousins, and is still lower than it was at the start of the year.
Although it is too early to say for sure, the GBP to NZD pair has made a decisive move above the upper trend-line border of the channel and risen all the way up to the 50-day moving average situated at 2.1012.
This is likely to provide tough resistance to any further gains, preventing any easy moves higher, and the exchange rate may stall and go sideways, or even correct back, for a while before it resumes its ascent.
The expectation, however, is that the breakout will hold and the pound will continue higher, towards its next target at the monthly pivot and cluster of March highs, with an eventual target situated at 2.1304.
After that there is further potential for the exchange rate to go even higher, towards the target calculated from the height of the channel extrapolated from the breakout point up, which leads to a minimum price expectation of 2.1875.
NZD/USD Decline Has Further to Extend
Turning to the headline New Zealand to US dollar exchange rate, we note the prospect of further declines with analysts at U.O.B in Singapore suggesting the corrective pull-back has scope to extend to 0.6765.
The exchange rate has fallen from its peak at 0.7054 reached on April 19 and is now quoted at 0.6871.
“Our recent bullish expectation for NZD was proven wrong quickly as the stop-loss at 0.6910 was taken out. We hold a neutral view now and consider the current movement as a corrective pull-back which has scope to extend lower to 0.6765,” says a foreign exchange forecast note from U.O.B at the start of the new week.
Overall, analysts believe this pair is expected to remain under pressure unless it can reclaim 0.6940.
FX Themes to Watch Over Coming Days
For the pound the main - pretty much one and only - theme at the moment is the assessment of the probability of a Brexit.
Recent polls showing a rise in the vote to stay in the EU are the main driver behind the current rally, as investors start to crystallise a view that the populace will vote to Bremain. The pound has lost between 8 and 10 percent in value purely as a result of fears of leaving the EU, but this hefty premium is ripe to be reimbursed should the odds begin to fall heavily in favour of the pro-EU vote.
For the Kiwi, the main influencer is the outlook for monetary policy.
After cutting rates in March to 2.25%, the big question investors are asking themselves is whether the Reserve Bank of New Zealand (RBNZ) will cut rates again next week, when they have their April meeting on Thursday April 28.
The current consensus is that they will not, based on recent positive data for housing and inflation, but most of all because Dairy Prices made a strong recovery of 3.8% at auction on Monday.
The fall in dairy prices had been a major concern for the RBNZ because dairy products are the country’s principle export, so they may have been tempted to cut the base interest rate, in order to weaken the kiwi, so as to make dairy products from New Zealand cheaper and more competitive.
However, following the recovery in dairy prices at the two most recent auctions that seems much less likely.
With a high 2.25% interest rate the New Zealand dollar gains a lot of value simply from foreign investors buying it for the interest, which is the highest in the G10, and compares very favourably, to the euro-zone where the ECB has set the rate at 0.0%, the UK where the BOE has set it at 0.5% and the US where the Fed has set it at 0.5-0.75%.
New Zealand Data
The RBNZ meeting will dwarf all other data releases in the week ahead, however, the Trade Balance (Mar)is released on Tuesday.
"New Zealand’s inflation remained low, but picked up to +0.4% yoy in 1Q16: this will probably not spur the RBNZ to cut rates at its meeting next week," says a foreign excxhange strategy note released by UniCredit Bank in Milan.
Building Consents on Thursday - which could give an insight into New Zealand’s overheating housing sector (mainly Auckland), and Finally, on the same day ANZ Business Sentiment for April.
The main focus for the pound this week will be the release of first quarter GDP data on Wednesday April 27.
The pound may experience some choppiness if the data shows a dramatic fall in growth, which is possible given the contraction experienced in certain secotrs of the economy as a result of Brexit fears.
On Monday data from the Consortium of British Industry (CBI) will show the level of orders of new businesses.