Pound-New Zealand Dollar Week Ahead Forecast: NZD Finding its Feet

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- GBP/NZD dips below key 2.0 level

- Charts suggest pressures ahead

- NZ Dollar lifted by strong Chinese PMI data

The New Zealand Dollar starts the new month on the front foot, courtesy of some better-than-expected data out of China overnight.

Both the New Zealand Dollar and Australian Dollars were seen outperforming their FX peers after China’s November PMIs were released over the weekend, and all three beat expectations.

The Caixin manufacturing index came in at 51.8, beating market expectations for a reading of 51.5. This is also a three year high, suggesting the Chinese economy might finally be reaching a turning point.

The official manufacturing and non-manufacturing indices out of China also beat expectations, with the former rising above 50 for the first time since April.

China is the main destination for New Zealand exports, and a pick-up in activity in the world's second largest economy therefore bodes well for the New Zealand economy's outlook.

This has registered on currency markets with the New Zealand Dollar advancing against the Pound, Euro and U.S. Dollar on Monday.

However, there appears to be some domestic impetus to the currency on Monday after a commitment by Finance Minister Grant Robertson at the weekend to deliver extra spending to boost infrastructure as part of the government's short to medium term spending plan.

Robertson told the Labour Party's annual conference in Whanganui that:

"We are currently finalising the specific projects that the package will fund but I can tell you this - it will be significant."

Markets reckon the boost in spending will shore up the New Zealand economy, and ease pressure on the Reserve Bank of New Zealand to further cut interest rates. A by-product of lower interest rates tends to be a weaker currency, hence the developments are seen as being NZD supportive.

The Pound-to-New Zealand Dollar exchange rate is presently quoted at 1.9989, down 0.60% on where it ended on Friday.

The decline at the start of the new week paints a picture of a deteriorating short-term outlook for the GBP/NZD exchange rate, and we do see the potential for further weakness over the course of the coming week.

From a technical perspective, it appears the rejection of the multi-week highs at 2.0573 back on October 16 marked a turning point for the currency, which has since entered into a gentle downward-sloping trend.

The downtrend has since seen the psychologically significant level of 2.0 broken, and the prospect for further losses is elevated.

Note that the GBP/NZD exchange rate would need to close below 2.0 on a daily basis for us to become more bearish short-term, therefore how Monday ends could be key to determining how the remainder of the week plays out.

If we take a step back and look at the longer-term picture, we note the GBP/NZD exchange rate is still in an uptrend, that has been in place since late July.

Owing to the strength of the previous uptrend we would be tempted to suggest it will ultimately reassert itself, however, the longer the current phase of weakness extends, the less confident in this assessment we become.

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New Zealand Dollar this Week: Key Drivers to Watch

The New Zealand Dollar will ultimately remain prone to global investor sentiment: the general rule-of-thumb goes that when investors are confident and stock markets are moving higher, the New Zealand Dollar is supported.

However, we would point out that the source of investor sentiment is key: the rule holds more weight if a boost to investor sentiment emanates from China, of which New Zealand's economy bears close ties.

This trend is particularly relevant at the start of December, owing to the already-mentioned Chinese numbers. We would keep an eye on newswires to see how the ongoing U.S.-China trade negotiations evolve over the week for further guidance on Chinese sentiment.

Positive news on this front might aid further NZD upside.

On the domestic scene, markets will be looking for signs that the New Zealand economy's recent soft period is coming to an end.

Sharon Zollner, Chief Economist with ANZ says recent developments on the data front "have certainty been more positive, with business and consumer confidence lifting, the PMI rebounding into expansionary territory, and the housing market picking up. The Government is sounding more amenable to spending a bit more."

"Commodity prices are holding up well and global financial market sentiment has lifted, but the hard data is yet to confirm a global growth turnaround," says Zollner.

Data out on Monday showed New Zealand's Terms of Trade improved notably in the third quarter, with export prices increasing by 1.9%, ahead of expectations for 1.2%.

This suggests that a potential turnaround in global trade, linked to China, might be underway, and is already having a positive impact on New Zealand.

The rest of the week is dominated by the release of the results of the latest GlobalDairyTrade auction (Wednesday 4 December, mid-morning GMT).

"The GDT Price Index is expected to lift by another 1.5% at this week’s event. Offer volumes are starting to decrease seasonally while immediate demand remains robust. It is, however, the first auction since the tariff-free window closed," says Zollner.

Another significant event to keep an eye on is the Reserve Bank of New Zealand's Capital Review, which falls on Thursday December 05, at 12:00 GMT.

"The RBNZ will announce new bank capital requirements and its estimates of the policy’s costs and benefits," says Zollner.

The outcome of the review could well influence future expectations for economic growth, as well as potential changes to the country's basic interest rate in 2020. All of which are likely to have a bearing on the value of the New Zealand Dollar.

"The bank capital decision this week may add a further headwind. We’re not out of the woods, but the risks now feel more balanced than a few months ago. That said, we think that beyond the near term the RBNZ still has more work to do to get inflation up to 2% sustainably – we’re picking cuts in May and August, taking the OCR down to 0.5%," says Zollner.

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