Upside momentum in the GBP to NZD exchange rate is likely to carry the pair higher as pressure increases on the Reserve Bank of New Zealand to cut interest rates.
The NZ dollar has been helped lower by last week’s RBA action and analysts are expectimg this theme to persist as expectations evolve towards more than one further cut from the RBA.
Softer than forecast trade data out of China released over the weekend also suggest NZD strength will face challenges, despite resilient local data.
The GBP/NZD has broken above the 50-day moving average and out of a falling wedge pattern, both quite solid signs the exchange rate is expected to go higher.
It is currently trading at 2.1156 New Zealand Dollars (kiwis) to one pound.
The MACD momentum indicator has moved above the key zero-line distinguishing an up-trending from a down-trending asset.
The height of the wedge at its tallest point can be used as a method of forecasting how high the exchange rate is likely to go after it has broken out, by extrapolating it up from the point of the breakout.
This leads to an upside minimum target of roughly 2.1650 and a maximum potential target of 2.1940.
The R1 monthly pivot at 2.1419, however, is an obstacle to further growth, as traders tend to cluster counter-trend orders round pivots in order to trade the rebound.
Nevertheless, a clear move above 2.1500 would probably confirm a bullish continuation higher to the minimum target at 2.1650.
A move above 2.1532 will probably add impetus to the up-trend as it represents the March highs.
NZD & GBP Fundamental Themes to Watch
The kiwi has lost ground following increased speculation that the Reserve Bank of New Zealand (RBNZ) will cut interest rates in the months to come after the RBNZ made it clear they thought the currency was trading at too elevated a level.
BNP Paribas analyst Charlotta Puhringer, expects the kiwi to gradually weaken in 2016 as a result of the RBNZ lowering interest rates and commodities in general declining.
“With the Fed likely on hold during 2016 we think pressure could build on the RBNZ to act sooner, and see scope for the markets to bring forward their RBNZ easing expectations,” says the analyst.
In the short-term, however, this seems less of a concern, as the likely trajectory for the pair is upwards as the pound recoups its referendum premium; assuming, that is, the Remain camp continue to lead in polls.
The Financial Times composite poll has actually shifted back to a closer race between the Remain and Leave camps after Remain started to pull-away materially last week, although Remain still lead by 3.0%:
“We note that betting market odds for the UK to leave the EU have picked up from around 28% to 33% over the past week. With the FT’s composite poll tracker putting the remain lead at just 3 points, we would not be surprised to see betting odds drift towards opinion polls in the run-up to the referendum.” Comments ING’s Viraj Patel.
Soft PMI data, showing Manufacturing fall into contraction mode at 49.2 has been another notable drag on the pound. Construction and Services both remained above 50, which denotes growth, but came out below expectations.
It seems rate hike expectations are currently back in the frame, with markets – either correctly or incorrectly – judging the possibility of s 2016 interest rate hike as more plausible following a referendum win for Remain. One notable detractor of this point of view is
Capital Economics who expect Brexit to actually lead to a higher chance of a rate hike than a win for the Stay party.
All Eyes on FSR This Week
This week sees the Reserve Bank of New Zealand update the country on its macro-economic policy via its Financial Stability Review (FSR).
The big question to be answered will concern the RBNZ's stance on the ever-heating property market.
It appears that measures introduced to cool the market have thus far failed; indeed the 30% deposit requirement for Auckland property purchases appears to have exported the heat to New Zealand's regions.
This is important - the RBNZ can't lower interest rates too agressively as it risks stoking the housing market. Therefore, other measures are needed.
If fresh measures are announced we could well see the NZD decline as putting a cap on house price growth will allow the RBNZ to seek NZD-negative interest rate cuts unhindered.
UK Data Out in the Week Ahead
The most important overall release will be the minutes of the Bank of England (BOE) rate meeting on Thursday May 12. The spotlight will be on a) whether the voting has shifted and b) whether international factors remain a concern.
UK Manufacturing Production is out on Wednesday and is forecast to show a rise of 0.3% in March, from -1.1% in the previous month.
Given the low Manufacturing PMI of 49.2 registered in April, analysts will not be expecting a very high result, however, if it is in oine with expectations, it may moderate the negative view of Manufacturing and indicate the low April PMI could be revised up.