GBP/NZD Outlook Hinges on Key 2.30 Zone
The pound sterling must break through a key resistance level against the New Zealand dollar to keep its hopes of a sustained recovery alive.
The GBP to NZD exchange rate must break through the 2.30 resistance line - an area of resistance that once broken could allow the conversion to test the best levels of 2015 once more.
Sterling has been in a downtrend against the kiwi since the 22nd of September. In mid-October the pair bounced higher but we are yet to receive confirmation that a turnaround is occuring and further declines are possible.
The kiwi dollar has moved past its mid-week dairy price slump and it appears traders are seeing the currency discounted within the frame of its recent period of appreciation - more gains could lie ahead.
The NZD fell after it was reported that dairy prices declined for the first time in 5 auctions - while the 3.1% drop was small compared to recent increases, it was enough to solidify the near-term bottom in GBP/NZD.
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The moves in the currency this week confirm that dairy prices remain a key determinant of near- and longer-term direction in NZD.
This week’s Fonterra’s Global Dairy Trade (GDT) online auction saw mixed results, with a 3.1% drop overall.
All commodities except anhydrous milk fat, buttermilk powder and rennet casein fell in price.
Butter recorded the biggest drop (11.1%), after a 13% rose at the previous sale.
The drop to a weighted average across all commodities of US$2,735/t (£1,767/t) follows three consecutive rises in the average price at the wholesale auction.
At present prices remain consistent with Fonterra’s NZD4.60 per kg MS 2015/16 milk price forecast, but if predictions of an El-Nino event come into fruition, prices could move up sharply in the New Zealand summer months.
This weather-related risk to the New Zealand dollar exchange rate is therefore one out of the hands of policy makers.
But, were such a negative weather-related event to occur then we could imagine the Reserve Bank of New Zealand would consider lowering interest rates to support the sector.
Such a move would add to the NZD downside story.
That said, there is a danger we focus to heavily on dairy prices at the expense of other sectors of the NZ economy which continue to improve.
High immigration levels and low mortgage interest rates have helped ensure the services sector of the economy remains strong.
"We continue to hold high hopes for the tourism sector, which has solid structural and cyclical supports, with the lower NZD underpinning visitor spending. The dairy sector is a key component of the local economy, but other parts matter too," say ANZ Bank in a currency note to clients.
