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The Pound-to-New-Zealand-Dollar Rate in the Week Ahead: Downtrend to Resume

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- GBP/NZD to resume bear trend over coming days.

- But rebound on Wangzhou incident a possible spoiler.

- GBP eyes parliamenty Brexit vote as geopolitics drive NZD.

The Pound-to-New-Zealand-Dollar rate remains in a downtrend and will continue lower this week despite fundamental forces that could offer the exchange rate a temporary rebound.

Worsening relations between the U.S. and China have had the effect of undermining the New Zealand Dollar (Kiwi) recently after the arrest of Chinese Huawei executive Meng Wanghzou last week reignited previous tensions.

Currently, the Pound-to-Kiwi trend remains downward on a technical basis the exchange rate is forecast to resume its decline in the coming week.

Above: Pound-to-Kiwi rate shown at daily intervals.

A break below the 1.8279 lows would lead to a continuation of the trend down to a target at 1.8000. This major whole number will then form a natural and opportune level for traders to cover shorts.

There may already be signs of a resumption lower after the pair entered what some traders call the ‘sellzone’, the space between the 10 and 20-day moving averages (MA), and formed a bearish down candle.

Although the bearish candle was not very strong, it does fulfill the basic criteria for a resumption of the downtrend and suggests the pair could already be preparing for another move lower.

Above: Pound-to-Kiwi rate shown at daily intervals.

The monthly chart also continue to tell a bearish story. The pair made a clear pivot at the October swing-highs when it also formed a shooting star Japanese candlestick pattern followed by a long, red, bearish marabuzo bar in November. Taken together these are extremely bearish technical signals.

Above: Pound-to-Kiwi rate shown at monthly intervals.

An Elliott Wave analysis of the monthly chart also suggests the pair is likely to extend lower, first to 1.7000 and possibly even until the price reaches the level of the October 2016 lows at 1.6300.

The move lower from the October highs lends itself to being labeled as a 5th wave of the entire move down since 2015, which would suggest more downside unless it was one of the rare truncated 5th waves that occasionally occur and fail to retouch the lows of wave 3 (estimated to be in October 2016).

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The New Zealand Dollar: What to Watch

With little major economic data on the calendar the most important fundamental driver for the Kiwi in the week ahead is likely to be evolving diplomatic drama between the U.S. and China over the arrest of Meng Wangzhou, the CFO of Chinese tech giant Huawei.

Meng is alleged to have breached U.S. sanctions against Iran and is being held in Canada pending extradition south of the border for trial. China has demanded she be released, describing her detention as “unreasonable, unconscionable and vile in nature.”

The issue is fast becoming a major diplomatic incident hat could easily impact financial markets. There is a real chance China might take retaliatory trade sanctions against the U.S. or Canada unless Wangzhou is released, which could see Presidents Donald Trump and Xi Jinging's "trade war" cease fire all but thrown in the bin.

The incident bears parallels with the Pastor Brunson episode in Turkey when the U.S. imposed sanctions against the nation because of what it said was the unfair imprisonment of a U.S. cleric by Turkish authorities. That contributed to the collapse of the Turkish Lira.

Something similar could now happen between China, the U.S., and Canada. Quite how this would play out for the economies of the various powers is difficult to predict, but given China’s greater dependence on the U.S. it could be more likely to lose out from any escalation.

As such, if anything the Wangzhou incident could be detrimental to the Chinese economy and therefore by implication the New Zealand economy given the close economic links between the two. Thus the Kiwi is at risk of weakening from an escalation of geopolitical tensions in the week ahead.

 

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The Pound: What to Watch

The coming week promises to be busy for Sterling with markets focused on the implications of a crucial Brexit vote in Parliament, whenever it eventually comes before MPs. 

It is an event which has the potential to start a new era for the Brexit story and Theresa May’s future in her role as Prime Minister and leader of the Conservative Party.

The government has been expected to lose the vote, which is why the Tuesday ballot was postponed, causing short-term weakness for the Pound.

For Sterling, the extent of the eventual loss in parliament is key. If it is smaller than expected, May could take heart that some further concessions on the political declaration from European leaders can help the deal go through.

"We would not expect Sterling to slump if she loses by a narrow margin," says Thomas Pugh with Capital Economics.

If the government loses by 200 or more votes Theresa May could be forced to resign. She could also simply head back to Brussels and insist talks are reopened, telling the European Union if they do not a 'hard Brexit' becomes inevitable.

The Labour Party may also force a vote of no-confidence that could lead to a general election if the government loses, however this would require some Conservative Party MPs to vote with the opposition, which seems unlikely.

"A decisive defeat could have a more significant market impact though. Theresa May might have to face down a vote of no confidence in the government and a leadership challenge, which would rattle markets," says Pugh.

A second referendum is also said to be a further possible outcome, however we doubt there is a majority in the House of Commons for this.

The bottom line? No one quite knows what will happen next.

"Political uncertainty is likely to continue to hang over the economy for at least the next few months," says Pugh.

Beyond Brexit, labour market data is forecast to show little change in November, with the unemployment rate stuck at 4.1% and pay excluding bonuses rising by 3.2% during the month. 

"We expect to see another robust, if unspectacular, rise in employment in the three months to October. Meanwhile, wage growth probably edged up further," say Capital Economics.

 

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