A bullish pattern on GBP/NZD's chart confirms more upside is possible near-term.
A soft start to the week for GBP/NZD as Sterling succumbs to a broad-based wave of selling.
The decline comes amidst shifting global dynamics rather than any UK-based events.
Indeed, we continue to watch for whether the Trump-trade dynamic has died - this trade has benefited Sterling through November as markets reprice the currency in line with the country's rising bond yields.
There has however not been enough damage to the GBP/NZD charts to suggest the November uptrend in the pair is over.
Recent action shows the pair to have traded broadly sideways forming a what is known as a bullish pennant or possibly flag pattern.
The pennant signals the likelihood of further upside on the horizon.
The steep rally before the formation of the pennant’s triangle - known as the ‘pole’ - provides a tool for estimating the extension higher.
This is done by extrapolating the pole higher from the base of the consolidation which gives a target at roughly 1.8500.
Therefore, a break above the 1.7900 level would probably confirm a continuation higher towards a target at 1.8490, where resistance is likely to kick in from the R2 monthly pivot.
1.8000, however, provides a more conservative target for traders.
More upside is forecast as the pair has already shown several very bullish signs.
These include the breaks above the 50-day MA, the trendline and the steepness of the initial ascent.
RBNZ Financial Stability Report Ahead
It is the bi-annual Financial Stability Report (FSR) from the RBNZ due on November 30 that markets will focus on from a fundemantel perspective.
"While the RBNZ will reiterate that the financial system is sound, it will be the RBNZ’s discussions regarding risks that will be more interesting. Similar risks to the May report will be highlighted again, but we wouldn’t be surprised if the RBNZ acknowledges that risks have eased modestly since then," say ANZ Research in a client briefing.
If correct, then the week's main fundamental event could prove to be a positive one for the NZD.
The May report saw three broad areas of concern: 1) the global backdrop; 2) dairy sector strains; and 3) excessive house price growth in Auckland.
Since May, ANZ note:
- The global backdrop has arguably stabilised. As the RBNZ noted in its November Monetary Policy Statement, economic indicators in some countries have improved. That said, it is certainly still a backdrop where risks are skewed to the downside, and we expect the RBNZ’s tone to reflect that. In particular, we expect it to talk about heightened political risks, the risks of increased market volatility, and the challenges the likes of China are still dealing with in regards to its structural adjustment and high corporate leverage.
- Dairy sector risks have fallen. Since May, we’ve seen dairy prices rise solidly and Fonterra has upgraded its payout forecast – those farmers not dealing with production challenges will be looking at positive cash flow in 2017. That said, the RBNZ will still be cautious, noting uncertainty over the sustainability of price gains and the sector’s still-high debt levels.
- The housing market has cooled. It is clear from recent housing and new lending data (as well as anecdote) that the RBNZ’s latest round of LVR restrictions are biting. However, the RBNZ will certainly be reluctant to declare victory yet, particularly with affordability metrics remaining extremely stretched and household debt levels back at records. Previous rounds of restrictions proved to have only a temporary influence on market activity.
Data for the Pound
The main release in the week ahead is Manufacturing PMI in November on Thursday, December 1, which is forecast to rise to 54.5 from 54.3 previously.
Construction PMI, out on Friday, December 2, is forecast to fall to 52.3 from 52.6 previously.