The New Zealand Dollar has advanced against the Pound at the start of the new year with GBP/NZD quoted at 1.7769 at the time of writing.
The pair remains in familiar territory however - GBP/NZD has been caught in a sideways drift since the middle of November; akin to the performance of many other GBP-based exchange rates.
The steadily rising consolidation range lows is however a bullish sign which indicates to us a slight bias that could lead to an eventual upside breakout in early January.
From a fundamental perspective, what happens next could depend on the decision of the Supreme Court in January.
The outcome is likely to be binary for the pair, with a decision to require an act of Parliament leading to short-term Sterling strength and the decision to enable the government to use its prerogative powers, negative, as it will increase the chances of a “Harder” Brexit.
Our hunch is that the law lords will require an Act of Parliament to trigger Brexit, which is likely to lead to a short-term rise in Sterling, potentially push it above the current range highs at 1.8000.
That said, there is also the risk that such a decision is nothing more than a damp squib for the currency as we note Theresa May has already signalled a willingness for Parliamentary scrutiny.
The situation is liquid and the UK currency remains highly sensitive to sentiment requiring those with an interest in the FX markets to keep an eye on the headlines.
From a technical perspective, further Pound Sterling strenght is likely to be thwarted by the resistance which lies at 1.8032 from the R1 and is likely to prevent more upside:
For confirmation of a clean break out of the range, I would ideally wish to see a break well above the R1 signaled by a break above 1.8100.
Such a move would probably reach an initial target at 1.8200, although it would be likely to move higher to 1.8275 afterward, where tough resistance once again kicks in from the R2 monthly pivot.
Commodity Currencies to Struggle
The commodity dollar complex - AUD, NZD and CAD - have been struggling of late and we hear they are likely to continue struggling.
"Part of that has to do with the prospect of further US Dollar strength but the 4% drop in the Chinese Yuan since October and the 7.7% drop since April takes a big bite out of the purchasing power of the Chinese, who play a big role in the outlook for Canada, Australia and New Zealand," says Kathy Lien, Director at BK Asset Management in New York.
Lien notes that Australia and New Zealand could feel the pinch of higher interest rates in the US and weaker Chinese growth.
"Many Australian companies have also borrowed in US Dollars and the cost of borrowing will rise in the coming year. Since we are looking for further U.S. dollar strength, AUD and NZD are likely to move lower and this downtrend will ease the pressure on the Reserve Banks to lower rates. Growth should be slow as job growth remains a problem," says Lien.
Indeed, Australian GDP actually contracted in the third quarter of 2016, much to the surprise of analysts. Will 2017 see the Reserve Bank of Australia cut interest rates in response to slowing growth?
If so, then AUD could struggle over the course of the coming year, allowing Sterling opportunity to remain supported.
“In New Zealand, growth has been better than expected but weaker dairy prices and slower Chinese growth could curtail the recovery in the coming year. There are no major economic reports from New Zealand in the coming week but Australia and China's PMI numbers will be in focus along with the country's trade balance,” says Lien.
Data, Events to Watch for the New Zealand Dollar
The week begins with Global Dairy Prices on Tuesday, January 3 at 15.10 (GMT).
The release is of importance to the Kiwi as Dairy products are the country’s primary export so an increase in global prices for them is likely to increase the value of the NZD as it raises aggregate demand for the currency.
The last release showed a temporary slowdown of -0.5% after a run of strong results, so the January 3 result could be key in dictating market sentiment as further declines may indicate the early development of a downtrend for prices.
Data, Events to Watch for the Pound
The main data releases for this week are Manufacturing, Services and Construction PMIs for December.
The week starts with Manufacturing PMI on Tuesday, January 3 at 9.30, which is forecast to pull-back a basis point to 53.3.
Construction PMI follows on Wednesday, January 4, and is forecast to rise to 53.0 from 52.8.
Services is out on Thursday, January 5, and is forecast to pull-back to 54.7 from 55.2.
Should the data beat expectations then we would expect GBP to catch a bid.
Anything below consensus and Sterling could struggle.
Bank of England’s (BOE’s) Andy Haldane is speaking on Thursday 5 - we are not expecting any major moves in the currency on the back of Haldane's appearance, but he is worth watching.
Should Haldane hint at a potential interest rate rise in the future then Sterling should find itself headed higher.
Lending and Consumer Credit data is out on Wednesday the 4th; again this should not be a major market move but should be instructive on the direction of the UK economy heading into the new year.