The GBP/NZD exchange rate has pulled back temporarily after rising to the highs of its recent consolidation range.
The pullback came amidst broad-based demand for NZD after New Zealand GDP data showed the New Zealand economy grew by a greater-than-expected 1.1% in Q3.
The correction was only temporary, however.
The Pound remains supported by news UK GDP data was revised higher from 0.5% to 0.6% for the Q3 period.
Concerning the immediate outlook for the GBP to NZD conversion, the short-term trend higher remains intact.
Our studies suggest a break above the top of the range, above 1.8003, would confirm a move up to the next resistance level at 1.8100.
A break above the top of the range and 1.8003, would confirm a move up to the next resistance level at 1.8100.
A further break above 1.8150 would then signal a continuation to 1.8300 - a target calculated by extrapolating the range by a Fibonacci ratio of 61.8% higher.
The Demise of Carry to Weigh on NZD
From a fundamental perspective, the New Zealand Dollar has a mixed outlook.
On the positive side, it is supported by an economy that boasts a relatively strong growth trajectory of 3.3% per annum and high-interest rates at 1.75%.
On the downside, however, are fears about a slowdown in its major trading neighbours China and Australia during 2017.
There are also questions to be asked concerning trade protectionism when Donald Trump takes over at the helm of the world's largest economy in 2017.
When interest rates were low in the US, the flow was from the US to New Zealand but now rates are going up in the US the flow is coming back which partly explains the steep fall in NZD/USD.
Higher rates globally have eroded appetite for the Carry Trade of which The New Zealand Dollar benefited so very much from.
Scotiabank’s FX Strategist Shaun Osborne takes the concept one step further in a recent note advocating an ‘anti-carry’ trade idea to sell AUD/JPY.
“Carry trades have done well this year overall, with carry-focused strategies gaining fairly consistently relative to other stylized currency investing techniques.
“Markets are, if anything, cyclical, however; leaders become laggards and vice versa.
“Given the focus on US growth prospects and the risk that rising US interest rates prompt more volatility and an investment environment that that is less suitable for riskier investment strategies, such as carry trades, 2017 may see something of a reversal in returns from these two approaches,” said Osborne.
The loss of Carry demand is likely to put further downside pressure on the New Zealand Dollar, which is likely to translate into more upside for GBP/NZD.
Brexit Talk To Influence Sterling
The Pound has softened slightly after the resurgence of more talk of a “Hard” Brexit, although weakness was offset by the proposal currently gaining traction, of an interim “transitional” period during which the UK would purchase access to trade within the EU, whilst negotiating a proper exit.
Liam Fox has suggested a transitional phase might resemble the Turkish model, however, Theresa May did not provide any details when she was asked about how an interim model might look.
If there is any further talk of Brexit from leading authorities in the week ahead then that could move the Pound, since data is very thin, and only includes Mortgage Applications in November, which is forecast to show a rise of 41.6k in the month of November from 40.3k in October.