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The Pound-to-New-Zealand-Dollar Rate in the Week Ahead: Big Bear Trend Continues

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- GBP remains in nosedive mode since reversing at 2.04.

- "Trade war" detente to lift NZD and aid GBPNZD descent.

- GBP eyes Brexit headlines, NZD looks to Washington, China.

The Pound-to-New-Zealand Dollar rate declined sharply in November and has entered the new month in bearish form, leaving it vulnerable to a further fall. 

This strong bear trend is likely to continue during the week ahead, in part because longer-term charts also support a downside bias for the pair.

The monthly chart shows how GBP/NZD formed a bearish shooting star in October, which was confirmed by the long and red down bar in November.

Above: Pound-to-New-Zealand-Dollar rate shown at monthly intervals.

The pair has also performed a pivot-swing lower over the last three months after breaking beneath the October lows at 1.93. This is a further bearish sign and indicates a possible change in the overall trend.

An Elliot wave analysis of the pair also suggests a continuation lower. Monthly charts show the pair has been falling in what resembles a large Elliot wave, which began at the 2015 highs, and is probably now declining in a final wave 5. 

Elliot wave analysis suggests a continuation down to a target of 1.7000, at around the wave 3 lows. Most wave 5’s fall at least as far as the end of wave 3 except on rare occasions when they are truncated.

The daily chart shows the pair in full bear mode at the start of the new trading week. The next key low is at 1.8330 but it is possible the market will reach this level fairly quickly. The next target after that is 1.8000.

Above: Pound-to-New-Zealand-Dollar rate shown at daily intervals.

The New Zealand Dollar is likely to start the week on the front foot after a meeting between President’s Trump and Xi at the G20 yielded an agreement to avoid an escalation of the trade war. The U.S. will suspend a January 01 tariff increase for 90 days while talks take place. The Kiwi is extra sensitive to news concerning China, New Zealand's largest trade partner.

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The New Zealand Dollar: What to Watch

The main fundamental driver of the Kiwi in the week ahead will be the impact of the Chinese-U.S. detente agreed by president’s Trump and Xi over the weekend.

This is likely to substantially strengthen the New Zealand unit, which tends to rise on good news for China.

The main economic release for the week ahead is the Global Dairy Trade Index (GDT) out on Tuesday at 14.30 GMT. The GDT provides details of price changes seen at the fortnightly global dairy auction.

Dairy products are New Zealand's key export so a rise in prices tends to be supportive of the Kiwi currency. This is especially true for whole milk powder.

Milk prices have fallen steadily this year, and declined -1.8% in the auction two weeks ago. Kiwi farmers and the economy will be hurt by even lower prices, and some are already feeling the pinch of earlier declines.

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The Pound: What to Watch

Brexit politics will probably dominate the Pound in the coming week as Theresa May tries to woo as many MPs as possible to vote for her withdrawal deal.

As things stand, however, it looks increasingly unlikely she will be successful and there is significant uncertainty as to what will happen following the defeat with a number of potential scenarios likely to play out.

The uncertainty is likely to ensure Sterling trades recent ranges with traders unwilling to take a big directional punt on the currency until such a time as they know what the future EU-UK relationship will look like.

At the weekend Sam Gyimah, the Science and Universities minister, became the latest member of May’s government to resign after saying leaving the EU risked the UK’s interests being “repeatedly and permanently hammered,” and that the UK was at risk of losing ‘its voice its vote and its veto’.

Gyimah appeared to endorse a second referendum in his resignation note on facebook, saying, “we shouldn’t dismiss out of hand the idea of asking the people again what future they want, as we all now have a better understanding of the potential paths before us”. His voice added to the growing number now calling for a second referendum.

Prime Minister May only has a majority of 5 seats in Parliament including her DUP allies who number 10 and all of them have said they will vote against her deal because it leaves Northern Ireland vulnerable to being treated differently to the rest of the British Isles.

Further opponents include 'brexiteer' rebels and 'remainers' from with her own party. Labour and other opposition MPs will also be encouraged to vote against her by their party whips.

This leaves the most likely outcome of the December 11 vote a defeat for the government. Experts say this would be most likely followed by either a general election or a second referendum, both causing further uncertainty, and probably keeping Sterling pressured.

On the 'hard' data front, the main releases for the Pound in the coming week are the three Purchasing Manager Index (PMI) surveys for November.

The first PMI to be released is Manufacturing, on Monday, at 9.30 GMT. It is forecast to show a recovery to 51.5 from 51.1 previously.

Construction PMI is out on Tuesday at the same time and is expected to show a fall to 52.6 from 53.2 in the previous month.

Services PMI - the more important of the three - is released on Wednesday and is forecast to rise to 52.5 from 52.2 previously.

PMI’s are often used by economists as a leading indicator of economic growth as the results often signal changes taking place in the broader economy before they are revealed in hard data such as GDP.

A result of over 50 signals an expanding economy whilst below 50 contraction.

Another key event in the week ahead is a speech from Mark Carney the governor of the Bank of England (BOE) on Tuesday at 9.15. This is followed by a speech from BOE’s Vlieghe on Tuesday at 18.00, and Haldane at 18.00 on Monday. Recently the bank released a worst case scenario of how Brexit would impact on the economy.

New car sales in November are set to be released at 9.00 on Wednesday and are considered a positive barometer of wealth creation.

 

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