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- GBP/NZD mounts recovery after ANZ survey hits the Kiwi.
- As nearly half NZ businesses say conditions to deteriorate.
- But GBP/NZD charts continue to argue for further downside.
The Pound surged higher against the New Zealand Dollar Wednesday, aided by an ANZ survey that showed business confidence falling close to its lowest level since the financial crisis in July, stoking fears for the Kiwi economic outlook.
ANZ's business confidence index dropped to -44.3 in July, down from -38.1, which is the worst reading for the survey since August 2018. The result came after some 44% of businesses told the bank they now expect general business conditions to deteriorate in the year ahead.
The result could mean the Reserve Bank of New Zealand (RBNZ) will have to cut its interest rates on as many as two occasions in the months ahead, which would see cash rate fall from 1.25% to 0.75%, according to ANZ. Lower rates usually mean weakness for a currency because they lead to lesser capital inflows from foreign investors.
“The outlook for the economy is deteriorating. Despite generally good commodity prices and interest rates at record lows, the headwinds of a global slowdown and credit and cost constraints appear to be winning out. With the inflation outlook not consistent with the target midpoint we expect two more OCR cuts this year, helping the economy to find its feet once more,” says Sharon Zollner, chief economist at ANZ.
Above: ANZ business confidence index alongside own activity index (blue).
Fewer firms saw activity levels increasing in July and more expected to have to make job cuts in the year ahead. And none of the firms responding to the survey are planning to increase investment. Profit expectations were lower too, with 16% of respondents expecting profits to decline, up from 13% previously.
Agriculture was the worst-hit sector with 78% of respondents seeing conditions deteriorate over the year ahead. Retail was the least pessimistic sector, with only 30% of respondents expecting things to get worse.
The survey results do not bode well for GDP growth because capacity utilisation, which measures how much of a company’s resources are profitably at work rather than standing idle, fell 5 points in July. It is the closest gauge in the survey to GDP.
From a currency perspective, and based on the current technical picture on the charts, the GBP/NZD rate appears to have put in a minor bottom after falling in a concerted downtrend since the beginning of May.
The tentative recovery was aided by the depreciation of the Kiwi following the business survey results, which led to the formation of a bullish Japanese hammer candlestick reversal pattern at the recent lows.
Above: Pound-to-New-Zealand-Dollar rate shown at daily intervals.
The bounce has been accompanied by a bullish convergence between the relative-strength-index (RSI) momentum gauge and the market price. This happens when prices make a new low but the RSI does not corroborate it.
Yet despite the recovery and the bullish convergence, the recent bearish trend is still intact and given the old adage ‘the trend is your friend’, we still hold the view that a continuation lower is the most likely scenario from here.
The weekly chart shows the bigger picture and how the pair is probably in the midst of forming a bearish measured move, or abcd pattern. This argues for a prolongation of the current down-move to a target at 1.7600, which is based on the principle that a measured move tends to have legs of equivalent length.
Further downside would be conditional upon a break below the 1.8280 lows.
Above: Pound-to-New-Zealand-Dollar rate shown at weekly intervals.
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