The British Pound to New Zealand Dollar exchange rate has reached record lows in the 1.77s - levels not seen for decades.
There is a growing concern that the UK currency is starting to look too cheap against its antipodean counterpart; if this is correct then 2017 could well yield a recovery bounce.
We explore the evidence.
Current GBP/NZD levels are well below the long-term average of 2.50, and it alone suggests the possibility the pair is grossly undervalued and therefore at risk of rising.
Further evidence that the exchange rate could be due a rise comes from the pattern formed by the MACD momentum indicator on the extremely long-term monthly chart stretching back to the early nineties.
As referenced on the above chart, the MACD has not been making lower lows like the exchange rate has.
MACD measures momentum and the because it is not making lower lows in line with the exchange rate shows diminishing bearish conviction.
The non-confirmation is called bullish convergence as it can indicate a higher chance the bear trend may be reversing to bull.
The theoretical chart below, of EUR/USD, also shows non-confirmation between MACD and price, although it is showing a lack of confirmation between price which is making higher highs and MACD, which is not making higher highs – and is actually making lower lows instead.
Research shows that when this happens three times in a row it is often a good signal to sell the asset if in an uptrend – or buy – if in a downtrend.
It has happened three times in a row on GBP/NZD which increases the probability the trend may be about to rotate and move higher.
An Elliot Wave Interpretation Does However Suggest More Losses
Apart from the converging MACD, there is also another long-term bullish sign.
The move down since 2000 could be interpreted as a very large Elliot wave which is probably completing its fifth wave at the moment.
Given fifth waves are the final waves in Elliot cycles, once complete the pair should begin rising.
Wave 5’s are identified by the fact they make new lows on weakening momentum, as is the case with the wave five on the chart above.
The evident steepness of the sell-off in the recent wave down is actually a bearish sign.
Bottom line: given the steep descent and the lack of stronger confirmation from price action itself, more downside is still expected, until a strong reversal signal is provided; however, the probabilities are increasing that this will happen.
Remember - if you have impending GBP/NZD payments you must keep an eye on the market rates on offer.
Our data is showing that some banks are offering rates as low as 1.67 while the better offers are coming in at 1.7450.
Furthermore, if Sterling is to rebound in 2017 you shouls ensure your currency provider has the correct buy orders in place to take advantage of any snap higher.