3 Reasons to Sell Sterling vs. New Zealand Dollar: Lazytrader's Colville

- GBP/NZD formed a bearish pin-bar last week

- This could mark a turnaround in the pair

- Fibonacci and relative interest rates also bearish

The Pound-to-New Zealand Dollar exchange rate has turned bearish, and the technical set-up suggests deep declines are possible in the month’s ahead, according to Robert Colville, trading mentor, trader and founder of Lazytrader, a CPD-accredited forex trader training programme.

GBP/NZD surged higher last week, reaching a peak just above NZ$2.00 to the Pound, following the Reserve Bank of New Zealand’s (RBNZ) decision to lower interest rates by 0.25% to 1.5% citing domestic and global headwinds as rationale.

However, the flash higher proved short-lived as markets appear to have largely priced in the cut and were looking for concrete signs that further rate cuts were likely over coming months.

The message from the RBNZ was a wait-and-see stance would be adopted.

The pair lost ground during the remainder of the week and as cross-party Brexit talks hit a brick wall the losses accelerated.

The resulting chart pattern formed by the roller coaster volatility was a bearish pin-bar reversal pattern which is a long bar with a short body ('body' is the space between open and close) in the lower half, much like a shooting star Japanese candlestick pattern.

“Last week closed as a bearish pin-bar reversal which is a sign we are eventually going to go down, and we have a number of clues that support this,” says Colville, adding that although this is a major bearish sign it is only one piece of evidence for the bearish case. “Frankly a bearish pin-bar reversal is not enough on its own.”

But it is backed up by other evidence: the next major bearish sign is that the recovery since December 2018 has now risen up and “just kissed the 0.382 Fibonacci retracement”, a key resistance level on the chart.

The 0.382 Fibonacci level is the 38.2% retracement from the long market decline between 2015-18 expressed as a ratio. It is one of a handful of certain retracements including the 61.8%, 50.0% and 78.6% which are said to have support and resistance properties because they relate to the Fibonacci ratio, a mathematical constant which defines a series of numbers by addition of the previous two integers.

The 0.382 ratio is especially potent as a resistance level since it has past form, it has already successfully rejected the exchange on two out of the three previous meetings, once in the autumn of 2017 and the other time in the summer of 2018. The fact it has defended two out of the three previous challenges is a sign it will probably be successful again.

A further sign the pair will probably decline is provided by the patterning of the price action since the rise from off the December 2018 market lows. The rally has formed a bearish ABCD or Gartley pattern according to Colville.

ABCD’s are like large zig-zags in which wave’s A-B and C-D are generally either of a similar length or a length determined by the a Fibonacci extension. In this case C-D has extended the length of A-B by a Fibonacci ratio of 1.272. This suggests the pattern is complete and the market is ready to turn and decline.

Colville sites a fundamental reason for the decline as the interest rate differential between the United Kingdom, where interest rates are only 0.75% and New Zealand where they are 1.5%. This means investors purchasing the Kiwi gain an automatic 0.75% profit simply from holding the currency. The incentive is a reason to expect greater Kiwi buying.

From a seasonal basis, June and July also tend to be months in which GBP is often weaker than NZD.

A break above last week’s high at 2.0003 would negate the bearish trade idea and is a suggested stop loss level for the pair.

Potential downside targets include 1.9335, based on a risk reward of 1:1; then the 1.8140 lows of 2018, and possibly even the 1.6400 lows of 2016.

Downside confirmation has already been provided by the break below last week's lows.

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