New Zealand Dollar Under Pressure, Even Against the Battered Pound

The Pound to New Zealand Dollar exchange rate trades sideways for a third day confirming a high probability of exhaustion in GBP/NZD's decline as the NZD's soft October continues.

GBP/NZD trades at 1.7339 at the time of writing - where it was 24 hours previously and near the previous week's close.

This suggests the pair is locked in a short-term sideways move which is surprising ensuring the Kiwi is a rare bright spot for the under-fire Sterling. 

The New Zealand Dollar is in fact suffering against the US Dollar and Euro too which confirms the wider sell-off experienced by the currency this October is extending.

RBNZ Assistant Governor McDermott spoke on Tuesday, reiterating the line that further policy easing will be required to ensure that inflation settles toward the centre of the target range.

McDermott said one of the reasons for New Zealand's subdued rate of inflation was the strength of the NZD.

"The New Zealand dollar has remained elevated despite periods of increased risk aversion and steep declines in New Zealand’s export prices. The strength of the New Zealand dollar has dampened the prices of New Zealand’s imports, and contributed significantly to the current low inflation, particularly in the tradables sector."

The threat of further interest rate cuts in response to both low inflation and a strong NZD, potentially as soon as November, appears to be keeping the NZD under pressure.

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.

 

Improving Outlook for GBP/NZD

Technical evidence suggests exhaustion in the GBP/NZD's decline and the picture here is actually surprisingly bullish.

The pair formed a right-angle triangle which broke to the downside, as expected, and reached its target.

Triangles are often the penultimate ‘wave’ or formation before the end of a trend.

This would indicate the final spike lower may be the last move in the broader downtrend, and a reversal is, therefore, imminent.  

Price action has formed a ‘Hammer’ Japanese candlestick pattern (circled below) with a long ‘wick’ or ‘tail’.

The candle has printed below the lower Bollinger Band, the light blue, shaded region around price, which increases the possibility it could be signaling the down-trend has reached an exhaustion point and therefore could be at risk of a reversal.  

The Bollinger Band is an envelope around prices, calculated by taking the 20-period simple moving average and then marking two lines, one above and other below which sit at 2-standard deviations from the mean.

Theoretically, prices move within the bands for 95% of the time.

This means that when they stray outside there is a high probability that they will revert to the mean – or in layman’s terms move back inside towards the central area.

When a move outside the bands happens in conjunction with a long-tail hammer it increases the odds prices will move back inside the bands or even reverse trend.

These set-ups have a high probability success rate of reversal and a move above 1.7520 would likely lead to a move up to 1.7800.

From a fundamental perspective there remains at risk of further GBP/NZD downside owing to the overwhelmingly negative sentiment towards Sterling.

Yet, Friday’s sell-off may already have priced in a relatively ‘hard Brexit’, given how steep and prolonged it was.

Just how much more negativity can Sterling absorb without it becoming even more undervalued?

If markets decide GBP is a bargain over coming days we could well see it stage a recovery in line with the technical analysis we made.

Therefore, for those looking to swap NZ Dollars for Sterling, now is certainly a good time to do so.

Data to Watch for the New Zealand Dollar this Week

There is no top tier data for the kiwi in the coming week so little volatility is therefore expected.

Nevertheless, tier two data is released on Monday with Electronic Card Sales in September, which is forecast to fall by -0.4% mom in September.

New Zealand Business PMI for September is out on Tuesday.

Events to Watch for the Pound this Week

There is little by way of frontline data out of the UK this week, however even if there were data for release on recent evidence we doubt it would have much of an impact.

Indeed, Sterling is almost exclusively focussed on political headlines at present so keep an eye on the newswires.

However, there is some action to be had on Friday, October 14, the Bank of England host an event which could impact on the outlook for monetary policy.

The “Future Forum” sees all the members of the MPC speak.

“The subject of the Forum is "How can the Bank service society and maintain stability in times of change?" which doesn't sound like a policy-heavy day, but with microphones in front of the Governors and no MPC meeting this month, there will be ample opportunity to provide views.