Pound / New Zealand Dollar Rate Enters Short-Term Technical Downtrend

Image © Pavel Ignatov, Adobe Stock

- New sequence of descending peaks and troughs on 4hr chart

- Possibility GBP/NZD biased for further losses

- Volatile and 'binary' risks to Sterling a possible spoiler

The Pound-to-New Zealand Dollar exchange rate may have reversed trend in the short-term. 

The pair was going higher after breaking out of a triangle pattern in September, however, it has since reversed and started declining quite sharply.

The descending sequence of peaks and troughs, of lower highs and lower lows, visible on the four-hour timeframe chart below, suggests the pair may have entered a short-term technical downtrend.

According to the old market adage "the trend is your friend until the bend at the end," and this suggests trends have a propensity to extend. If the pair has, indeed, interest a new downtrend, the odds will now favour more downside rather than upside which has significant implications for forecasting future price-action.

The pair has broken out of a long-term triangle pattern and reached an upside target of 2.04. This target was based on the height of the triangle extrapolated to the upside by 61.8%, which is the minimum expected reach for a breakout.

It is possible, therefore, that now the move has met its target it may have exhausted its upside potential, further supporting the idea it may have reversed into a new downtrend.

It is often said by technical analysts that triangles are the penultimate patterns in trends and are followed by the terminal move in that trend. If this is true then the pair may have completed its final uptrending move at the recent 2.04 highs.

Elliot wave analysis also backs up this idea since triangles tend to form as wave 4s, and Elliot waves are formed of 5 trending waves followed by 3-wave corrections.

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The most recent decline was caused by a rise in the New Zealand Dollar (Kiwi) because of higher inflation data, which some analysts think could prevent the RBNZ from cutting interest rates.

One factor detracting from the positive impact of the data was that most of the rise in inflation was due to an increase in 'tradeables' inflation, which means trade in commodity goods, such as oil.

If it is a rise in commodity prices which has pushed up inflation rather than higher domestic demand, the RBNZ may dismiss the significance of the data, because it will say it was caused by short-term fluctuations in commodity markets. Oil, for example, has risen quite a lot recently and this may have caused the inflation.

The Reserve Bank of New Zealand has said in no uncertain terms that it will not be compelled into action by any pickup in inflation that is driven only by an increase in commodity prices.

ANZ bank says the data won't change the RBNZ's slightly negative bias in relation to interest rates, whereas Westpac another major Antipodean bank, is saying that the data has probably reduced the chances of a rate cut.

One fundamental factor which could be supportive of the new technical downtrend, however, is the general risk-on tenor of global financial markets at the moment.

This follows months in which the opposite was the case and markets were more jittery. This was caused by a mixture of factors but mainly Donald Trump's trade spats with China and NAFTA countries, the crisis in the Lira and Argentina, the rise of nationalism and populism the world over, and generally widespread emerging market concerns.

These now appear to have abated, especially after the new USMCA deal was agreed by the US, Mexico, and Canada as a replacement for NAFTA, and the return of imprisoned US cleric Brunson from Turkey.  

The main factor impacting on the Kiwi, however, is the negative effects of the trade war between China and the US on the Chinese economy. China is a major importer of New Zealand exports such as dairy products, lumber, and other soft commodities, so a slowdown in China would have negative consequences for NZD.

Yet there may be a case for seeing brighter prospects for a new, better, relationship emerging between the US and China.  

Trump's key reasons for mounting the trade war with China was to rebalance the deep trade deficit between the West and China as well as bringing about a rebirth in US manufacturing via the 'made in America' ethos.

However, the reality has been more complicated and many economists are saying the fallout from the trade war has impacted negatively on US companies.

This is especially true of companies and sectors in Trump political strongholds - such as soybean growers - which the Chinese have tactically targeted to inflict the most pain on Trump.

Now the close proximity of mid-term elections means there could be an incentive for Donald Trump to make a deal with President Xi Jinping lessening the pain on some of his most loyal voters.

Notwithstanding the factors that could further support the Kiwi, we can't ignore the other side of the GBP/NZD trade - Sterling.

The Pound is set for a potentially volatile future dependent upon the outcome of Brexit talks.

The options market is already reflecting this fact as the cost of a type of option strategy used to profit from increased volatility, called a 'straddle', has increased recently amidst rising demand from traders.

The inference is that outcomes for Sterling are currently especially 'binary', with a 'no-deal' outcome sparking a sharp decline and a 'deal' sparking a sharp surge.

Thus although GBP/NZD has begun a new downtrend it is still in the very early stages and there are significant binary risks from Sterling, which could see the trend whipsaw either one way or another, in the run-up to the official Brexit data in March 2019.

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Lock in Sterling's current levels ahead of potential declines: Get up to 5% more foreign exchange for international payments by using a specialist provider to get closer to the real market rate and avoid the gaping spreads charged by your bank when providing currency. Learn more here