GBP/NZD has formed a bullish chart pattern following Trump’s presidential win, as flows were diverted away from higher-yielding currencies such as the New Zealand Dollar due to a closing interest rate differential.
One Pound Sterling buys 1.7592 NZD at the start of the new week - a touch less than it commanded at the end of the previous week.
The exchange rate remains well above the floor formed at 1.69-1.70 formed in October having rallied on the back of falling interest rate differentials with other major currencies.
The NZD has long been a beneficiary of the ‘carry trade’ whereby investors borrowing in extremely low-interest rate currencies such as the Euro or the Yen and purchasing higher-yielding currencies such as the New Zealand Dollar.
However, following Donald Trump’s win interest rate expectations have risen globally on the back of hopes he will initiate a public spending drive.
This has driven up expectations for higher inflation rates in the United States AND other developed markets, which has in turn driven up interest rate yields in these countries.
This has reduced the attractiveness, and therefore flow into NZD, which is backed by a base interest rate of 1.75% (the highest in the G10).
With that difference now narrowing the NZD is expected to lose some of that flow advantage.
Technical Outlook for the GBP/NZD
GBP/NZD has formed what looks like a bullish flag pattern after consolidating a square sideways range following a strong move higher.
The flag signals the likelihood of further upside with the length of the flag pole providing an estimated reach if extrapolated higher from the base of the consolidation.
As such, a break above the 1.7800 pattern highs would probably confirm a continuation higher towards a target at 1.7900 followed by 1.8000.
The pair has already shown several bullish signs after breaking above major trend-line and posting three bullish reversal candlesticks in a row – a strong bullish signal in its self.
Data For the New Zealand Dollar This Week
Due to the Kaikoura earthquake it is not certain whether data will be released, the most significant of which is Retail Sales..
“The release schedule for data provided by Statistics New Zealand is still uncertain following the earthquake that hit on 14th November.
“However, if real retail sales figures are released this week, we suspect that they will show that there was a notable slowdown in spending in the third quarter.
“Meanwhile, the widening in the seasonally-adjusted trade deficit in September (Friday) was probably almost entirely reversed in October,” says Paul Dales at Capital Economics.
From a data perspective, the week kicks off with Retail Sales for Q3 (qoq), on Tuesday, November 22 at 21.45 (GMT), which is forecast to come out at 0.8%.
Core Retail Sales, released at the same time, is forecast to come out at 1.1% in Q3.
The Reserve Bank of New Zealand (RBNZ) cut rates recently prompted by falling inflation and the overly strong New Zealand Dollar, and whilst that was seen by many as ‘one and done’ any further price weakness could increase expectations of yet more cuts.
The Trade Balance for October is released on Friday, November 23 at 21.45.
New Zealand Data may be affected by the Earthquake which occurred on November 14.
Data for the Pound This Week
The main event will be the Chancellor’s Autumn Statement on Wednesday, November 23.
Markets will be focused on the amount of fiscal stimulus the government is willing to spend, which if substantially higher is likely to support the pound as it will take the pressure off the Bank of England to print money and use that as stimulus instead.
Talk of stimulus may have been hyped as an admission of ‘outright loosening’ now seems unlikely, according to Capital Economics’ Paul Hollingsworth:
“All eyes are now on the Chancellor, who delivers his first fiscal set piece with the Autumn Statement on Wednesday.
“He will be constrained somewhat by recent poor borrowing numbers and a disappointing set of economic forecasts.
“Accordingly, we expect fiscal policy to be less tight than the current plans, rather than providing an outright loosening.”
Hammond has said the Government remains constrained by the country's huge debt pile and with economic growth remaining robust he will most likely opt for a conservative budget.
Expectations for a Trump-style fiscal boost are therefore likely to be misplaced.
In all, this should be a business-as-usual budget from a Pound Sterling perspective.
The government’s latest borrowing figures out in Tuesday, November 22 – the day before the budget - could provide a hint as to how generous Chancellor Hammond is willing to be.
Economists estimate a rise of 5.6bn borrowing in Net Borrowing by the government in October, from a previous 10.1bn.
A rise much above that will probably weigh on sterling as it will reduce the Chancellor’s stomach to open up the Treasury’s coffers.
Other data includes Q3 GDP on Friday. November 25 at 9.30 (GMT).
Preliminary estimates had it at a healthy 0.5% QoQ and unless the second estimate seriously disappoints we are unlikely to see much movement from this release.
Tuesday, November 22 sees the release of survey data from the Consortium of British Industry November.