Compressed Pound / New Zealand Dollar Exchange Rate Confirms a Big Break Lower on the Cards

Volatility in the GBP to NZD exchange rate has become increasingly depressed with the pair trading an ever-tighter range. This could be a warning of an imminent breakout.

The GBP/NZD is trading with in an increasingly confined space.

The past week has confirmed the pair is unwilling to close above 1.7920 or below 1.7827.

The exchange rate's range has been narrowing ever since the huge swings following the EU referendum and in the process it has formed a right-angle triangle on the charts which offers us some clues as to predicting the pair's outlook from here.

The move higher over recent days may have formed an ‘e’ wave up, which is normally the last wave in the formation of a triangle:

Right-angled triangles are special in that they provide clues as to the direction of the eventual breakout, which is always in the direction of the flat edge, which in this case would be down.

Such a move would have to break below 1.7500 for confirmation, but once below would probably run down to robust support at 1.7192, as a minimum target.

A move to 1.7192 would represent the strongest level experienced against the Pound since 1976 as we noted in our previous update on the pair.

Latest Pound / New Zealand Dollar Exchange Rates

	Live: 2.3088▼ -0.17% 12 Month Best: 2.3553
*Your Bank's Retail Rate	2.2303 - 2.2395
**Independent Specialist	2.2765 - 2.2857 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

Interest Rate Differentials to Keep NZD Supported Against GBP

Expectations that the RBNZ will cut rates in November increased after the Bank’s September statement in which they said the New Zealand dollar (kiwi) was too strong, and pretty much admitted to expecting to use further monetary easing.

The kiwi continues to be supported by New Zealand’s higher interest rates, which at 2.0% attract a lot of foreign capital seeking 2.0% returns.

This compares favourably with the UK’s 0.25%: rates are set by central banks.

Any deterioration in New Zealand's yield advantage could therefore undermine the currency.

However, for GBP/NZD, any cuts by the RBNZ are unlikely to have any material impact as the Bank of England is also expected to ease further.

According to analysts interpretations of Deputy Governor Nemat Shafik’s comments on Wednesday morning the question is not so much “if” as “when”.

Which means most analysts still expect a move from the BOE before the end of the year, and this continues to cap sterling gains.

British Pound to Struggle as Brexit Approaches

The Pound has been supported by relatively strong data of late, which seems to show the economy in rude health after Brexit.

However, headwinds continue to blow and they are expected to get stronger.

Sterling should be higher were it not for growing speculation that the government is gearing up for a complete withdrawal from Europe, including the trading club element called the common market.

International Trade Secretary Liam Fox is seeking for the UK to become an independent member of the World Trade Organisation - some would argue this is a pragmatic development but according to analysts at Citibank it could be seen as, “a clear signal of preparing the ground for an 'hard Brexit', which would involve leaving the EU’s single market entirely.”

The problem for Britain is that access to the EU's single market also requires the handing over of inter-European immigration controls, which is at odds with the sovereignty desired by the majority who voted for Brexit.

The issue has also been highlighted by Switzerland whose government has been making efforts to negotiate tighter immigration controls whilst maintaining access to the common market.

In the Swiss case, the EU would not budge on the principle of freedom of movement, so the Swiss had to hold a referendum on whether to quit the common market or tighten immigration controls.

“The Swiss parliament has chosen continued access to the EU’s single market over immigration controls demanded by a 2014 referendum, after unsuccessful negotiations with the EU. This points to a tough EU stance and difficult negotiations ahead for the UK as well,” argue Citi.

Indeed, we have heard from many analysts over recent days that one of their core reasoning for expecting a weaker British Pound remains the uncertainty posed by the difficult Brexit negotiations that lie ahead.

Continue to watch the newswires for further developments on this story as we expect GBP to remain sensitive to such headline risks.