GBP/NZD: Studies Suggest too Early to Call a Recovery

The Pound to New Zealand Dollar exchange rate is off its recent lows but  technical studies suggest the pair remains highly prone to testing all-time lows again.

1 GBP buys 1.7120 NZD at the time of writing having recovered from the lows set towards 1.69 in the previous week.

Those looking for a stronger Pound will be hoping what we are now witnessing is the establishment of some kind of floor from which a more sustained recovery can commence.

Indeed, we are seeing signs of such a floor building in other key GBP pairs and the broader Sterling complex could take instruction from developments in the headline GBP/USD.

“A fast and imminent continuation of the bearish trend at this stage is unlikely because a lot of UK bearishness is already priced in the exchange rate,” says Olivier Korber at Societe Generale.

While the NZD is still favoured owing to its positive momentum, a weakening of the New Zealand currency is not out of the bounds of reality.

Indeed, we have reported of late that a number of noted investment banks are expecting the long-term appreciation in the NZD to soon start modering.

Driving the view for a lower NZD profile going forward are heightened expectations that the Reserve Bank of New Zealand (RBNZ) will cut rates in November.

The probabilities of the central bank cutting base lending rates at its November meeting now stands at around 88% according to market-based indicators.

However, given the base lending rate stands at 2.00% even a likely 0.25% cut will mean it is still, at 1.75%, the highest in the G10, and much higher than the UK’s 0.25%.

Since the difference is the amount investors can earn simply by investing money borrowed in Pounds into New Zealand Dollar-based savings accounts, the advantage will be with the Kiwi, even after a cut.

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.

 

Charts Confirm GBP/NZD Downtrend Remains Intact

While the prospect of a base forming in the Pound to New Zealand Dollar exchange rate remains distinctly possible our studies to confirm the pair remains in a fairly strong downtrend.

Until the crash lows at 1.6500 have been breached, the pair remains in neutral territory.

The reason we are not more bearish despite the apparently dominant downtrend is because of the long hammer candlestick which formed on the day of the flash crash.

These extremely long hammers when occurring at the bottom of downtrends are often associated with exhaustion of the move down, and the start of a new young up-trend.

For such a move higher to be confirmed we would ideally wish to see the pair rise above the 1.7200 level, with targets then at 1.7300, 1.7400 and eventually 1.7450.

Data to Watch for GBP/NZD

The main release for the New Zealand dollar is the Trade Balance in September due out on Thursday October New Zealand time or Wednesday 22:45 BST.

Markets are forecasting a deficit of 1.265M to be reported on the monthly ticket which should take the year-on-year reading to a deficit of 3.100M.

An improvement in New Zealand's terms of trade could provide a temporary bounce to the currency.

As for the Pound, the most significant release in the week ahead is Thursday's Q3 GDP, which is forecast to come out at 0.3% qoq in the third quarter, and to show a 2.1% rise year-on -year.

Despite Brexit uncertainty, UK data remains robust with last week's retail sales data being particularly encouraging for the services-lead economy.

We believe however that data will play second-fiddle to news headlines concerning Brexit and which way the government is swinging on the bard-versus-soft Brexit scale.