Pound-to-New Zealand Dollar Week Ahead Forecast: Outlook Negative


New Zealand Dollar

Image © Natanael Ginting, Adobe Stock

- GBP/NZD falling within channel, outlook negative

- Support could lead to bounce before deeper sell-off

- Brexit vote main event for Pound

- Chinese data eyed by NZD

The Pound-to-New Zealand Dollar is trading at 1.9105 at the start of the new trading week after depreciating circa 1.5% in the week before.

Losses were mainly as a result of a lack of progress in Brexit negotiations, with Theresa May unable to get a compromise from the EU on the issue of the Irish backstop. As such she is unlikely to be able to get enough support for her deal when MP’s come to vote on it in the House of Commons on Tuesday.

GBP to NZD weekly chart

The technical outlook for the GBP/NZD pairing has flipped to bearish following a constructive setup seen for much of this year. The pair had been rising up in a channel and within that channel more recently, during 2019, in a smaller consolidation, which looks vulnerable to breakdown now, as illustrated on the chart above.

Heavy overhead resistance from the 200-week moving average (MA) means further upside may be difficult to achieve, and we see a move lower from here as a more natural next step.

GBP to NZD daily chart

The pair has fallen to the 50-day MA and there is a possibility it could bounce from this level, given large MAs provide strong underpinning support, however, the bounce is only likely to be temporary since the overall outlook is bearish, so the pair will, probably, eventually capitulate and continue falling.

The February lows at 1.8660 are quite important and if the exchange rate breaks below them the outlook will probably turn more bearish. A move below the 1.8660 lows will open the way down to the lower channel line at 1.8350. This could happen in the next two-week.

Beyond that, a break below the lower channel line, signaled by a fall below 1.8300 would probably indicate a clear breakout from the channel lower and decline towards a target in the 1.70s.

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New Zealand Dollar: What to Watch this Week

There are no major economic data releases from New Zealand in the week ahead so the fundamental news events which are most likely to influence the New Zealand Dollar are probably those from China, which is the largest single importer of New Zealand products.

Fears about a slowdown gathering momentum in China have impacted on both the Kiwi and its cousin the Aussie Dollar in recent weeks, so analysts will be keen to assess whether the hard data throws any further light on this theme.

Chinese data for retail sales, industrial production, and fixed asset production are out on Thursday at 2.00 GMT (at the same time for all three).

Retail sales are forecast to rise 8.1% in Jan-Feb, slightly down from the 8.2% of a year ago, but still very strong. Such a small decline would be unlikely to warn of a hard-landing for the Chinese economy, but a steeper decline would and could hurt the Kiwi.

Industrial production is forecast to rise by 5.5% from 5.7% previously, the same impact on the Kiwi as retail sales would be expected depending on the actual result.

Fixed asset investment is expected to rise even more strongly by 6.0% than the 5.9% previously.

“Key Chinese indicators for January-February will come under more scrutiny than usual on Thursday given the absence of the January data due to the long Lunar New Year break,” says Raffi Boyajian, an analyst from "A downside surprise in the numbers would add to concerns about the extent of the slowdown in the world’s second-largest economy, especially after this week’s dismal export figures, though there is some support from the recently announced fiscal stimulus measures and optimism about a trade deal with the US."

The signing of a trade deal between the U.S. and China would eliminate one major headwind for the Kiwi and is currently the more probable outcome according to analysts. There is more of an incentive for both superpowers to make a deal because it is economically in their best interests. This is especially the case given the growing U.S. trade deficit due to falling exports to China.

Trade talks more recently have been focused on currency manipulation, and although the Chinese are not ready to fully liberate their currency, the Chinese have said they will “avoid competitive devaluation” according to commentators.

“White House economic advisor Larry Kudlow said there was a breakthrough with China agreeing to promote “stable currency and avoid competitive devaluation. He’s “positive and bullish” on a US-China trade deal. And he expects the agreement to be finalised by April,” says the Actionforex team.

In a scenario in which China was to further relax their grip on their currency which they only allow to move by a maximum of about 1.5% in a day most experts think the Renminbi would surge higher. A stronger Renminbi would, if anything, be a benefit to exporters such as NZ, although the full economic impact could be more mixed and the impact on the Kiwi difficult to assess.

The Pound this Week: It's Crunch-time

The main event for Sterling in the coming week is Parliament’s meaningful vote on Brexit on Tuesday.

With no further concessions on the Irish backstop likely from the EU, and talks being described as being close to breaking down, Theresa May is now unlikely to present the changes required to win and the most probable scenario is that Parliament then moves to vote on whether or not to exit the union without a deal, on Wednesday.

Assuming it does not vote for this outcome - parliamentary arithmetic suggests this is highly unlikely - the next most probable outcome is that Parliament votes on Thursday to decide to request a delay of Article 50 and the whole Brexit process from the EU.

That there will be a delay is currently the consensus expectation. How this will affect Sterling is open to interpretation.

“If lawmakers choose to delay Brexit, a modest rise is attainable for the Pound, while a surprise backing of May’s deal could send the Pound surging above $1.35. But In the unlikely event that a no-deal wins support, sterling could crash below $1.27,” says Boyadijian,.

The Brexit deal faces a heavy defeat in parliament on Tuesday because she has so far secured no major changes from the European Union, the leaders of two major eurosceptic factions in parliament said on Sunday.

Nigel Dodds, the deputy leader of the Democratic Unionist Party (DUP) which props up May’s minority government, and Steve Baker, a leading figure in the large eurosceptic faction of her Conservative party, warned “the political situation is grim”.

“An unchanged withdrawal agreement will be defeated firmly by a sizeable proportion of Conservatives and the DUP if it is again presented to the Commons,” they wrote in the Sunday Telegraph.

In further, developments a Sunday Times report says May’s team have been warned by senior Brexiteers that she would get her deal passed only if she offered to resign by June so a new prime minister could lead the second phase of negotiations.

"We think Sterling faces a more difficult road," says James Rossiter, a foreign exchange strategist with TD Securities. "A lot of good news is already in the price and that investors may have gotten a little ahead of themselves in hoping for further positive developments. With the UK's data and event calendar relatively light until the 12th, we think Sterling may start to feel the effects of gravity once again."

The other main release is UK GDP which is forecast to show a 0.2% rise in January after a -0.4% fall in December when it is released at 9.30 GMT on Tuesday.

GDP is forecast to have risen 1.2% from a year ago, up from 1.0% previously. A higher-than-expected rise would support the Pound and vice versa for a lower-than-forecast result.

The trade balance in January is released at the same time as GDP and is forecast to show a -12.2bn deficit compared to -12.1bn previously.

Also released at the same time is manufacturing production and this is forecast to show a 0.0% rise in January month-on-month compared to the -0.7% previously.

Industrial production in January is released at the same time and estimated to have fallen by an even steeper -1.4% from -0.9% previously.

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