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Pound-to-New Zealand Dollar: Week-Ahead Forecast, News, and Views

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The New Zealand Dollar has lost ground over recent sessions despite a rise in dairy prices - a key export or the economy - and this was probably as a result of the currency absorbing political risk.

The up-and-coming New Zealand elections promise to cause movement in the Kiwi as both major parties are recommending reforms leading to a weaker currency, especially Labour, who are now marginally in the lead.

Analysts put the political risk premium at between 1-2% about a week ago, so much of the risk will now have been absorbed.

As we look to the week ahead for GBP/NZD we note how the pair has been tracing out wide swathes of buying and selling pressure, indicative of a highly volatile indecisive market.

GBP/NZD Reaches its Chart Target

Looking at the charts we note how GBP/NZD broke out of a large triangle pattern at the end of August, which it formed during 2017.

It has now almost reached the target for the breakout at 1.8200, calculated by extrapolating 61.8% of the height of the triangle at its widest point higher - this it almost achieved after posting a high of 1.8194 in the previous week.

GBPNZDSep10

The past week also saw a high level of volatility with large daily ranges for the exchange rate.

As such we would caution any traders intending to trade the pair at this current juncture as the pair is likely to be highly unpredictable and volatile for some time.

Although the 1.8200 target has as good as been reached and the pair is showing the sort of high volatility indicative of market turns, the short-term trend remains intact as long as Friday's 1.7908 lows hold, and a break above the 1.8250 level would confirm more upside to a target at 1.8300, although we urge caution given the current market conditions for this pair.

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Data and News for the New Zealand Dollar

A distinct lack of data in the week ahead means the New Zealand Dollar will "take its cue from risk appetite and the market’s demand for U.S. Dollars," according to BK Asset Managment's Kathy Lien.

Basically, this means is risk appetite falls the Kiwi will suffer and vice versa if it rises.

The data there is is confined to Electronic Card Sales in August - out at 23.45 BST on Sunday evening - which is forecast to show a 0.5% rise month-on-month, and then NZ Business PMI - a general barometer survey - for August, out on Thursday at 23.30.

The general election is on September 23 appears to be the main concern for the currency at present with a survey conducted by ASB of New Zealand businesses who trade internationally showing 44.5% have already increased their hedging activities, with a further 38.5% intending to increase hedging; only 17% cited the election as not having an impact.

Nerves have been heightened alongside the rise in fortunes of the Labour party which have a set of policies regarding the mandate and operation of the Reserve Bank of New Zealand which appear disruptive.

Labour want to add an additional objective to the RBNZ's mandate that would see the central bank target 'full employment' in the economy, and not just manage inflation.

Such a change would be expected to keep policy more accommodative for longer since unemployment is currently above the long-term average and the considered 'full' of 3.5-4.00%, standing as it does at 4.8%.

Analyst Viraj Patel at ING Bank N.V. says the NZD has yet to absorb all the political risk associated with the election, and that there is a probable further 1-2% decline expected in the run up to the election.

Data and News for the Pound

It looks set to be a busy week for the Pound with the Bank of England announcing their rate decision on Thursday, as well as data showing inflation, unemployment and wage growth.

The Bank of England is not widely expected to announce a change in policy on Thursday at 12.00 BST, and according to Canadian investment bank TD Securities, the voting is expected to show a 6-2 split in favour of keeping interest rates unchanged.

BK Asset Managment's Kathy Lien, highlights the continued weakness in "consumer spending and inflation," as a reason to expect the BOE not to, "veer away from its cautious tone."

Forecasters are expecting a rise in inflation when data is released at 09.30 on Tuesday, September 12.

The headline rate is expected to rise to 2.8% year-on-year from 2.6% in August 2016, and core inflation to 2.5% from 2.4% respectively.

Without a corresponding rise in wages, higher inflation is likely to weigh on the Pound rather than support it, as it simply results in everyone being poorer.

Which is why data out on Wednesday, September 10, is likely to be so important, as it will show the state of the UK labour market and wages. Expectations are for earnings to rise by 2.3% in August.

A beat on expectations in this number could prove to be supportive of Sterling.

Remember to keep an eye on politics at the start of the week as parliament intend to vote on the government's great repeal Brexit bill.

The Labour party are currently against the bill, which they say gives too much autonomous power to ministers to make changes to EU law once it is transposed into the UK legal system.

A small number of conservative MPs are also against the bill which means, the vote could be close given the government's slim majority.

A failure of the bill to pass, would cause volatility for the Pound but it is not clear in which direction.

The increased uncertainty caused by the Bill's failure would argue for Sterling to devalue owing to the increased uncertainty such an outcome would bring.

However, we see little chance of Conservative lawmakers rebelling against the Government; the party's slim majority means there is little appetite for an election which they could well lose considering Labour and the Conservatives are near even in the polls.

 

 

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