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Pound-to-New Zealand Dollar Rate Week Ahead Forecast: More Upside on Horizon as Recovery Continues

New Zealand Dollar

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- GBP/NZD to continue rising as new uptrend evolves

- Break above highs will confirm next wave higher

- Pound to be moved by Brexit news; New Zealand Dollar by risk trends

The GBP/NZD exchange rate is trading at around 1.9288 on Monday, after rising 0.38% in the previous week. Studies of the charts suggest the pair has probably reversed its medium-term downtrend and started a new uptrend which will probably continue rising.

The 4 hour chart - used to determine the short-term outlook, which includes the coming week or next 5 days - shows the pair having recovered since the July 30 lows.

GBP to NZD four hour chart

This now suggests the pair is in a short-term uptrend and given the old adage that ‘the trend is your friend’ we expect such an uptrend to continue.

A break above the 1.9415 highs would supply confirmation of a continuation up to a probable short-term target at 1.9600.

The daily chart shows how the pair has risen in an ascending channel, reached the June highs, and then pulled back.

Daily GBPNZD chart

The trend higher since the late July lows will probably continue in the medium-term up to a target at roughly 1.9750 based on an extrapolation of the rising channel.

The daily chart provides a view of the medium-term outlook which includes the next week to month.

The weekly chart shows how the pair has rebounded after finding support on a major trendline - it has broken above the 50 and 200 week MAs and is likely to continue rising up to a target at 2.000 and the b-c wave highs.

Weekly GBPNZD chart

The RSI momentum indicator is rising steeply in tandem with price action showing strong bullish momentum accompanying the rally, which supports the likelihood of a continuation higher.

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The New Zealand Dollar: Still a Slave to Risk

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The main driver of the New Zealand Dollar is likely to be global risk appetite, geopolitical events and the evolution of the trade war between Washington and Beijing.

On the domestic front, any commentary regarding future monetary policy could also impact on the Kiwi after poor data last week raised the probability the Reserve Bank of New Zealand (RBNZ) might cut interest rates to stimulate the economy, weighing on the currency in the process.

Trade tensions will come into focus after both the U.S. and China implement higher tariffs on each other's goods on September 1.

The market has already priced these in so the next big question is whether President Trump will escalate and stick to his recent threat to raise tariffs even higher - by a further 5% on all $550bn of imports. If he goes ahead the Kiwi will be one of the currencies which will suffer.

Another focus for markets will be China's reaction. So far Beijing has not risen to the bait but if it did retaliate this would rile markets and impact negatively on NZD.

"As a small open economy, New Zealand is at the whim of global forces. Recently, the global growth outlook has deteriorated further and trade tensions have escalated dramatically," says Sharon Zollner, Chief Economist with ANZ. "Elevated global uncertainty seems to be weighing on domestic firms’ sentiment, investment and employment. Overall, the risks are all looking pretty one sided."

On the domestic front, the New Zealand Dollar reacted negatively to the latest results of the ANZ Business Survey which showed sentiment hitting lows not seen since the great financial crisis.

The ANZ Business Confidence index fell 8 points to -52.3 in August, which continues a two-year trend of increasing pessimism among Kiwi firms and leaves the broad barometer of sentiment at its lowerst level since April 2008. The index has fallen below zero and moved further and further into negative territory since the 2017 election.

"The outlook for the economy appears to be deteriorating further, with firms extremely downbeat despite easier monetary conditions, fairly robust commodity prices, and positive population growth. Whatever the cause, the risk is rising that it becomes self-fulfilling. The decline in inflation expectations from 1.8% last month to 1.7% will be of particular concern to the Reserve Bank," says Zollner.

On the domestic front the week has started off on a bright note with the release of Terms of Trade statistics which saw a rise of 1.6% quarter-on-quarter in the second quarter, which comes in well ahead of analyst forecasts for a reading of 1.0%.

The rise appears to have been driven by a sharp rise in the value of New Zealand exports, to the tune of 3.4%, which offset a decline in the volume of exports to the tune of 2.6%.

Import prices only rose 1.8%, whereas markets were forecasting a rise of 2.0%.

The GlobalDairyTrade auction is due on Tuesday at 15:30 B.S.T.

"The seasonal increase in offer volumes will test the depth of the buying bench. Futures prices indicate a 2.5% fall in the GDT Price Index is anticipated by the market," says a preview note from ANZ.

 

The Pound: Political Fireworks

 UK flag

September 03 sees the UK parliament sit once more, and the return of MPs should herald what is potentially going to be the most explosive week of parliamentary politics of our generation.

We fully expect Sterling to react to developments in parliament, and therefore warn readers that volatility is likely to be elevated.

MPs return to a shortened parliamentary session owing to the decision by Prime Minister Boris Johnson to suspend parliament from September 12 to October 14. The move has galvanised those MPs in the House opposed to Brexit into accelerating the passing of legislation designed to frustrate the Prime Minister and remove the option of a 'no deal' Brexit taking place on October 31.

Reports out late last week suggest MPs have agreed the form of legislation they would want to present.

If markets deem the legislation as having the potential to pass, and block a 'no deal' then there is a decent chance Sterling can extend higher.

However, we are of the firm belief that the best possible outcome for those wanting a stronger Pound would be for a Brexit deal to be struck. We believe that removing 'no deal' from the equation lessens the incentive for European negotiators to offer the substantive changes on the Northern Irish border backstop that Johnson is seeking.

It also materially lessens the incentive for MPs in the House to vote for a deal.

Johnson is looking to strike a fresh agreement with the EU and see it passing through the House on the back of the votes of MPs who have no option but to vote for a deal if they want to avoid a 'no deal' outcome.

Keep in mind that it is also possible opposition leader Jeremy Corbyn calls a vote of no-confidence when parliament.

A vote of no confidence has a fairly good chance of being successful given the large number of rebel Conservative MPs who are against a hard Brexit.

Press reports out on the weekend suggests Johnson will look for those MPs who vote against the government to be expelled from the party. This could shrink the scale of the Conservative rebellion against him.

It could however free up a number of MPs to vote against their ex-leader.

We view a no-confidence vote as offering up fresh uncertainty, and therefore potential downside for Sterling.

However, highlighting just how difficult it is to judge the landscape, some analyst believe a no-confidence vote could in fact be good for the Pound.

“If we have that vote of no confidence, whilst it is uncertain what the outcome would be, the Pound would go up on that headline alone. So that is why I think there is a shimmer of hope for a tactical long trade,” says Jordan Rochester, an analyst at Nomura.

There is a risk the Pound could also gain a boost from a legal challenge mounted by the anti-Brexit campaigner Gina Miller, who is attempting to prevent the proroguing of Parliament in the high courts.

Miller's argument is that a proroguing of this length of time is unprecedented. That the Queen was ill-advised and that it is unlawful as it was undertaken precisely to prevent parliament from doing its job of scrutinising the executive.

Opponents claim parliament typically does not sit at this time of year anyway, to allow for party conferences and that it is not within the remit of the courts, as it is a solely political matter.

“The Johnson hijackers are saying that the prorogation of parliament ahead of a Queen’s speech is what always happens – and that it is no more than a normal convention and precedent in our unwritten constitution. But there is no convention or precedent for a five-week prorogation. In the last 40 years, parliament has never been prorogued for longer than three weeks. In most cases it has been prorogued for only a week or less, for example for 3 days in 2015, 5 days in 2016 and 6 days in 2017,” says Miller.

The court hearing for Miller’s case has been set for Thursday, September 5. If she is successful Sterling will almost certainly rally.

On the economic data front, the main releases are manufacturing, construction and services PMI data on Monday, Tuesday and Wednesday respectively.

These could impact the Pound since PMI’s are seen as fairly reliable leading indicators of economic growth, and a better-than-expected result is likely to lead to a rise in Sterling, whilst vice versa for a lower-than-forecast result.

Manufacturing PMI for August is forecast to show a rise to 48.4 from 48.0 when it is released on Monday at 9.30 BST.

Construction PMI is expected to show a rise to 45.5 from 45.3 when it is released on Tuesday at 9.30.

Services PMI is estimated to have fallen to 51.4 in August from 51.0 previously when it is released at the same time on Wednesday.

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