Despite the trend lower slowing we are forecasting a continuation of the pound to New Zealand Dollar exchange rate's (GBP/NZD) move lower in the absence of reversal signal.
- New Zealand dollar's uptrend could be about to fail warn Societe Generale
- Stronger inflation data gives NZD a breath of life at the start of the new week
Downside momentum in the GBP/NZD pair has slowed of late though and this raises the possibility of correction higher.
However, we are not yet ready to call such a recovery as this is not yet confirmed by and technical price action.
That said, there are some levels ahead they we expect the pound to find some relief.
Price action in the GBP to NZD has almost reached the S1 monthly pivot at 2.0447, and when it does it would be expected to stall at that level.
Monthly Pivots are levels where the exchange rate often stops to consolidate, bounce, or even reverse trend in some cases.
Trader’s use them to fade the dominant trend, scalping short-term bounces. A break clearly below the S1, however, signalled by the exchange rate falling below 2.0390, would confirm a continuation lower to the next target at the 200-week moving average at 2.0264.
Moving averages are focal points for increased trading activity as bulls and bears wrestle over the direction of the next break, thus the pair will probably pause at 2.0264.
Moderately positive data from China during the past week, which showed GDP coming out in line with expectations and Exports higher than forecast, indicated to investors that the slow-down in growth may not be as bad as some had thought.
China remains a major export market for New Zealand so ups and downs in the Chinese economy tend to be reflected in the movements of the kiwi, and the data helped support the New Zealand dollar (kiwi).
The currency was further supported by a 2.1% rise in global dairy prices, reported at the Global Diary Auction on Monday April 5.
Is Another Cut to the OCR Warranted?
The big question for many analysts and kiwi traders is whether the continued appreciation in the currency will elicit another rate cut from the Reserve Bank of New Zealand (RBNZ), which has already cut rates to 2.25% (from 2.50%) this year.
The RBNZ would ideally prefer the New Zealand dollar cheaper to aid exports, and one way to devalue it would be to lower interest rates.
Lower rates would slash the profit foreign investors would expect when buying New Zealand sovereign bonds and other financial assets, therefore curbing demand for the NZD in the process.
However, given the hot property market a cut in interest rates also runs the risk of overheating the economy.
"While we are forecasting a lower OCR, we continue to feel uneasy about the trade-offs a lower OCR will bring. Regional housing markets are booming, Auckland is coming back to the boil, and construction cost anecdotes are huge," says Cameron Bagrie, Chief Economist at ANZ Research.
Much depends on how exports fair, especially from the dairy sector which constitutes the country’s largest single export product.
Traders will be focusing heavily on the next Global Dairy Auction on Monday April 18, with another rise in prices expected to further support the currency going forward, which for GBP/NZD means more downside.
In relation to sterling, the main focus in the week ahead will probably be Brexit poll result, and how the large 20% undecided portion of the electorate are likely to vote at the EU referendum, now that the official campaign has started.
In addition, the testimony of Bank of England (BOE) governor Mark Carney at the House of Lords, could also impact on sterling, as he will be asked many questions concerning the potential impact of the UK staying or leaving the EU, and his answers could lend one side or other more credibility, swaying voters to its cause.
In previous questioning the BOE governor highlighted the risks to leaving more than staying.
Data Hotspots This Week
On Monday the the pound to New Zealand Dollar exchange rate is softer following the release of some stronger-than-forecast inflation data out of New Zealand.
CPI for the first quarter of 2016 read at0.2%, ahead of expectations for a reading of 0.1%.
Despite the beat on expectations we are not convinced this will be enough to convince the RBNZ higher interest rates are warranted. However, the reaction of the NZD suggests the opposite.
The GBP/NZD has fallen and is now quoted at 2.0478.
in the week ahead is likely to be New Zealand inflation on Monday morning (April 18).
The main focus in the week ahead for sterling, will be Brexit polls and Mark carney’s testimony to the House of Lords on Tuesday April 19, where he will cover such questions as: What risks are there to remaining in the European Union?
What risk does China pose to the UK economy? Is the housing market still the biggest medium-term risk to the UK economy, and how important is membership of the European Union to London’s status as a leading international finance centre? To name but a few.
Market commentators will no doubt be closely following his commentary.
However, on Wednesday April 20 we get the Employment report for March, with the Unemployment rate expected to remain unchanged at 5.1%, Average Earnings to rise to 2.3% and Claims to show a -10k drop.
Retail Sales data is released on Thursday April 21 and is expected to show a 4.2% annualized increase in March and a lesser -0.1% fall from -0.3% previously.
USD to NZD: Technically Stretched
The NZD/USD pair is meanwhile seen probing the upper part of recent consolidation zone and more importantly it is approaching towards an upward channel limit at 0.6970/0.7010.
According to Stéphanie Aymes at Societe Generale this level is also a projection for the pair's 'c wave' and as such, "the rebound since January seems laborious as highlighted by overlapping moves and the upside is likely to remain capped."
The chart's daily RSI is also sustaining below a horizontal resistance suggesting possibility of a short term retracement towards ascending trend at 0.68/0.6750, a break below will lead to a deeper down move