New Zealand coalition talks are likely to keep the GBP/NZD exchange rate supported over the course of the coming week but beware a swift resolution to New Zealand political uncertainty.
The Pound-to-New Zealand Dollar exchange rate is seen higher at the start of the new week at 1.8530 thanks to a broad-based recovery in Sterling owing to fading political uncertainty in the UK as Prime Minister Theresa May consolidates her leadership.
Meanwhile, political uncertainty in New Zealand will remains a focus for foreign exchange markets this week as the country's political parties jostle for power in coalition talks with king-makers New Zealand First.
A decent move in the exchange rate might occur on the conclusion of talks and the formation of a Government.
Nevertheless, political flux in New Zealand and the UK is reflected on the GBP/NZD exchange rate's chart by range-bound price action. The pair is seen bouncing within highs at 1.8730 and lows at roughly 1.8300.
The pair has been oscillating like this since the middle of September; earlier we thought it might be forming a triangle pattern but we are not sure now since the strong breakdown last week, which breached the lower border line of the possible 'triangle'.
As such, politics aside, there are signs that the Pound is vulnerable to further losses.
The current wave within the sideways move is still besarishly inclined and likely to go lower, moving back down to the floor of the range at 1.8300.
A break below the 1.8375 lows would help confirm a continuation down.
The MACD continues to curve lower in a bearish arc supporting the view that the exchange rate will fall too.
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Formation of a New Government Key for the NZD
The main event for the New Zealand Dollar in the coming week will be political, as a decision is expected from the leader of the third largest party as to which of the two major parties he wishes to do a deal with allowing the creation of a majority government.
The leader of New Zealand First, Winston Peters, has said he will decide which party to side with no later than Thursday, October 12.
He wanted the special votes to be counted first (they were collected and counted this saturday) and they resulted in the Nationals losing two seats to Labour and the Greens.
It does not change the fact that that Peters' NZ First party has the deciding vote - all now depends whether he sides with Labour and the Green party or the Nationals.
Given how the special votes increased Labour's share of the vote Peters could be more inclined to side with them now, which from a currency perspective would weaken the New Zealand Dollar as it would probably mean a harsher crackdown on immigration and foreign investment, making New Zealand more inward-looking.
"With the final election results in, coalition discussions now get serious. Markets still look to be pricing in a roughly ‘status-quo’ outcome. Alternatives arguably would bring more policy uncertainty," says a note from ANZ Bank ahead of the week.
ANZ say much will depend on the policy concessions required to get a deal over the line. "There is nothing bad about change per se. The key is how well it is communicated, as prolonged uncertainty can cause activity to stall."
Risks to the New Zealand Dollar are therefore largely two-way we believe: The New Zealand Dollar could pop if National are put back into office and the status quo survives but it could fall, initially at leas, on the installation of a new coalition government.
From a hard-data persective, the main releases in the week ahead sees the release of Electronic Card sales at 17.45 on Monday, October 8, which is forecast to show a 0.7% rise in September.
Business PMI Survey is the main release out at 17.45 on Thursday.
News and Data for the Pound
Politics was the main driver of Sterling in the previous week and it will probably once again be the main driver in the week ahead.
Sterling lost ground as a result of Prime Minister May's leadership coming under criticism, and whilst there are no signs she will resign the flak has weakened her position.
Over the weekend we have noted that the Conservative Party has rallied around May and her position looks to be secure once more and as noted by Viraj Patel at ING Bank N.V. this might offer Sterling some upside.
The coming week is a key time for Brexit negotiations as it will be the last week of talks before the EU summit to determine whether sufficient progress has been made to move onto phase two.
The consensus expectation is that progress will not be judged sufficient to move on.
"Barring any surprising breakthroughs, the EU27 is almost certain to vote that insufficient progress has been made to move onto the 2nd stage of negotiations," said Canadian investment bank TD Securities.
The most important had data to be released is Manufacturing and Construction Output data for August at 9.30 BST on Tuesday, October 10.
TD Securities, again, think there is a substantial chance of a deeper decline than the markets are expecting.
They say that although Manufacturing rose in June for the first time in 2017 they expect the gains to be at least partially retraced in August due to a fall in car sales.
They are also skeptical about the Construction Output result for August, saying that despite their model indicating an uplift due to a delayed effect from strong mortgage and house price data before, more recent Construction PMI's point to a decline.
Other releases to keep an eye on in the coming week are the Royal Institute of Chartered Surveyors (RICS) house price monitor at 00.01 on October 12; the Trade Balance at 9.30 on Tuesday, October 10 and the British Retail Consortium's (BRC's) Retail Sales Monitor on Tuesday at 00.01.