Pound to New Zealand Dollar Forecast: Uptrend Still Intact

new zealand dollar 4

The New Zealand dollar (NZD) has been bucked by volatility over the past 48 hours - it suffered on Fonterra's warning about the impact of a strong currency but then recovered after the government announced its budget was in surplus.

The GBP to NZD exchange rate fell from its perch just below the magic 2.20 level on the events. 

The NZD did however weaken, and declines in GBP/NZD were arrested, after Finance Minister Bill English said he is in discussions with the RBNZ on new macro prudential tools that are likely aimed at the housing market.

The suggestion that the government will introduce fresh policy measures to counter the house price bubble will allow the Reserve Bank of New Zealand to finally get a grip on the country's declining rates of inflation. Presumably they can now cut the main OCR rate at a more agressive pace.

This would slash the country's yield advantage and therefore diminish demand for New Zealand dollars amongst international investors.

Uptrend Higher for GBP/NZD Intact

Despite the recent bout of NZ dollar strength, in the GBP/NZD pair, sterling remains the dominant force.

The June referendum on UK membership of the EU is likely to dominate all sterling pairs regardless of the other currency’s own fundamentals, unless they are equally important.

With no sign that it is reversing the current short-term up-trend is likely to extend even higher.

MACD is above the zero-line and therefore supportive. The pair has also shrugged off the positive trade-balance data in favour of the pound, which has risen to just shy of the 2.1775 highs.

A break above these would initiate the next step higher, with a probable target then at 2.1886 where the R2 monthly pivot - a line traders use to fade the dominant trend - is likely to stall the movement higher.

There could be an inverse head and shoulders (H&S) bottoming pattern at the lows, which is another strong bullish reversal sign, and signals more upside on the horizon. 

GBPNZDMay25b

Above: The GBP/NZD daily chart, showing targets and the inverse head & shoulders pattern at the lows.

The Current Account: A Positive for the NZD Ahead

The kiwi is likely to gain support mid-year from a widening Current Account surplus.

The Current Account (CA) is the sum of a country’s outflows minus its inflows. (Broader definition here). 

A surplus reflects more inflows than outflows, and is therefore positive for a currency as it shows a net increase in purchases of New Zealand Dollars, and therefore is a sign of net rise in demand for the currency.

Although data has not yet been released for Q2, the strong cyclical nature of the CA (see chart below) shows that it is currently midway in the rising part of the cycle, and suggests therefore that data released on June 14, is likely to show an even wider surplus, which will be positive for the kiwi.

NZcurrentaccount

 

The cyclical nature of the NZ Current Account 

A further reason to expect the June CA data to show a widening surplus is that the April Trade Balance data, released on May 25 showed an unexpectedly high surplus and because the Trade Balance constitutes over 60% of the CA, a high surplus in the former in

April, is likely to increase the chances of a surplus in the later, for Q2.

The Trade Balance (TB) is the difference between the total spent on imported goods and the total earned from exported goods (into New Zealand). A surplus is positive for a currency as it shows more was earned from exporting than was paid out for imports - therefore there was a net demand for the New Zealand Dollar from sales of its exports.

NewZeaCA&TBMay25

The chart above shows the close correlation between cycles in the CA and the TB.

Data out on Wednesday May 25 showed a hefty NZ$292m TB surplus in April. This beat analyst’s estimates of NZ$60m and was much higher than the previous month’s 117m.

According to tradingeconomics.com the rise in the trade surplus was mainly due to a 16.0% rise in exports of fruit, which made up for a slump in Dairy exports, a previous mainstay of the economy:

“Exports increased to NZD 4300 million, led by a 16 percent jump in fruit sales, mainly gold kiwifruit (up 53 percent) and apples (up 29 percent). Shipments of logs, wood, and wood articles rose 14 percent, mainly untreated logs (up 12 percent). In contrast, sales of milk powder, butter, and cheese (the largest export commodity group) fell 6.7 percent, led by milk fats (down 17 percent) and milk powder (down 2.9 percent).”

GBP/NZD fell from, 2.1680 to 2.1610 in the 10 minutes which followed the release.

NZTradeBalance

The kiwi rose over 70 points against the pound after the release of Trade Balance Data  

The above-expectations rise in the TB in April is a positive early sign for the Current Account for Q2 and therefore assumes a pro-strength back-drop for the kiwi in coming months.

The stronger export figures and TB surplus means the Reserve Bank of New Zealand (RBNZ) may not be as worried as previously about the overvaluation of the New Zealand dollar and is therefore unlikely to cut interest rates soon.

A cut in interest rates is negative for a currency as it reduces capital inflows from foreign investors seeking a place to park their money and earn high interest returns.

The housing bubble in Auckland is another reason to expect the RBNZ to remain on hold longer, as a cut in interest rates would make it cheaper for house-buyers to borrow and make the bubble worse. House prices are now the highest in the world in Auckland when measured as a ratio of average incomes.