Pound-to-New Zealand Dollar Rate in the Week Ahead: Downtrend Bias Remains
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- GBP/NZD corrects strongly but bearish bias overall
- Pair continues declining in falling channel
- New Zealand Dollar to be driven RBNZ meeting
The GBP/NZD exchange rate is trading at around 1.8601 at the time of writing, having fallen 0.30% in the prior week.
Studies of the charts suggest there is still a very marginal bias for more downside subject to a break below the July lows.
The 4-hour chart - used to determine the short-term outlook, which includes the coming week or next 5 days - shows how the pair is in a downtrend within a descending channel and given the old adage that ‘the trend is your friend’ this overarching bear trend is likely to continue lower.
A break below the 1.8280 July 30 lows would confirm a continuation down to target at 1.8140 and the December 2018 lows. At the same time, the pair has recovered in a strong correction back up to the topside of a descending channel.
It has completed two sets of higher highs and higher lows - a sign a new uptrend may have started.
A break clearly out of the channel, therefore, signalled by a move above 1.8800, would provide strong confirmation of a reversal in the trend and a move up to a target at 1.8925.
The daily chart - used to give us an indication of the outlook for the medium-term, defined as the next week to a month ahead - shows the pair in a descending channel.
On the medium-term horizon, a break below the July 30 lows would take the pair to the next major target at 1.8000.
A break higher, however, might reach resistance at 1.9080 and the level of the 200-day moving average (MA).
The two targets are based on the fact that major MAs and major round numbers are often also strong support or resistance levels where prices stall or bounce due to extra supply or demand.
The weekly chart - used to give us an idea of the longer-term outlook, which includes the next few months - shows GBP/NZD forming a bearish measured move pattern.
The length of the final c-d leg can usually be forecast using the length of a-b, and in this case it suggests an end target of around 1.7600.
Whilst we retain a bearish outlook the pair has also formed a hammer candlestick recently at the lows (circled) which is a bullish sign and suggests extra caution in forecasting more downside.
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The New Zealand Dollar: RBNZ, Risk Trends to Dominate
The main domestic driver for the New Zealand Dollar in the short-term is likely to be the policy meeting of the Reserve Bank of New Zealand (RBNZ), on Tuesday, August 6, at 22.00 BST.
The RBNZ is expected to announce a cut in interest rates from the current 1.5% rate to 1.25% due a combination of a domestic slowdown and deteriorating global backdrop due to worsening trade tensions between China and the U.S.
Given markets are already expecting a rate cut and this has probably already been priced into the exchange rate, the thing that will impact on the Kiwi more, is whether the RBNZ plans any future cuts or not.
“Business confidence fell to the lowest in a year in July according to a closely watched survey by ANZ Bank, fuelling expectations that the RBNZ will move to provide more stimulus to a slowing economy,” says Raffi Boyadijian, an economist at FX broker XM.com.
Employment change data which is forecast to show a 0.3% rise quarter on quarter in Q2 when it is released on Monday at 18.45 could be one of the things which influences whether the RBNZ decided to cut more than once.
“If Tuesday’s employment report for the second quarter fails to impress, traders will likely raise their bets of further easing by the RBNZ in the coming months. This would be negative for the New Zealand dollar, which has slumped to six-week lows on the back of rising trade tensions and a firmer US dollar,” says Boyadijian.
Another key driver of the Kiwi is likely to be Chinese data because of the close trade ties between the two countries.
The Chinese trade balance is forecast to show a $44.2bn surplus in July when it is released on Thursday at 4.00 versus the $51bn in June. This would be in line with expectations of dwindling trade as the trade war with the U.S. bites.
There are signs the trade war is getting worse with a sharp devaluation in the value of China's Renminbi at the start of the new week taking a chunk of value out of the New Zealand and Australian Dollars.
Owing to the strong trade ties between China and the antipodean nations, the NZD and AUD are often considered a liquid proxy currency for Chinese exposure.
Last week, President Trump announced an extra 10% tariff on $300bn of un-tariffed Chinese imports starting from September 1. In retaliation, the Chinese suspended purchases of U.S. agricultural products.
The Yuan went into free-fall on the news on Monday and analysts are speculating Beijing has allowed it to depreciate so it can ‘weaponise’ the Yuan to offset the tariffs in a currency war with Washington.
The deterioration in trade relations is likely to impact negatively on the Kiwi because of its close trade ties with China, and dependence on healthy demand for its exports from the country.
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