Pound-to-New Zealand Dollar Week Ahead Forecast: Trend is Sideways with Marginal Upside Bias
Image © Naru Edom, Adobe Stock
- GBP/NZD is trading sideways as Brexit risks ease
- Break above range highs would drive market higher
- New Zealand Dollar to be driven by risk trends
The GBP/NZD exchange rate is seeing a solid start to the new week and is trading at around 1.9149, the gains will go some way in clawing back the 0.85% loss registered in the week prior.
Studies of the charts suggest the pair is trading in a sideways range with a marginal risk of a breakout higher.
The 4 hour chart - used to determine the short-term outlook, which includes the coming week or next 5 days - shows the pair currently trading in a sideways range between 1.90 and 1.94, after rising up from the July 30 lows and peaking at the 1.9413 August 28 highs.
Given the prior short-term uptrend during August is still intact and the bias remains for that trend to continue, the pair will probably breakout from its range higher with a break above 1.9425 confirming such a move to an upside target at 1.9660.
The daily chart shows how the pair is trading in a range after rising up during August.
GBP/NZD has successfully broken above the 50 and 200 day MAs which is a bullish sign.
The pair is likely to break higher for the same reasons given in the 4hr chart - the trend was up prior to the formation of the range.
It will probably rise up to a target at 1.9800, calculated by extrapolating the height of the range higher.
The daily chart provides a view of the medium-term outlook which includes the next week to month.
The weekly chart shows how the pair has rebounded after finding support on a major trendline - it has broken above the 50 and 200 week MAs and is likely to continue rising up to a target at 2.000 and the May highs.
The RSI momentum indicator is rising steeply in tandem with price action showing strong bullish momentum accompanying the rally, which supports the likelihood of a continuation higher.
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The New Zealand Dollar: What to Watch
The main driver of the New Zealand Dollar in the coming week is likely to be global risk appetite which appears to be recovering and thus supporting the Kiwi.
The improvement in risk sentiment was driven by the news last week that China and the U.S. have agreed to trade talks at the beginning of October, and the Peoples Bank of China (Pboc) has implemented more stimulus measures to support the slowing Chinese economy.
“In other news, the PBOC announced that it would reduce the reserve ratio requirement by 0.5% for all banks from 16th September (and an additional 1% for qualifying commercial city banks in October and November), which will free up around $126b in liquidity,” says Nick Smyth, an analyst at BNZ.
A decline in the U.S. Dollar also appeared to help support the rebound in risk. A weaker Dollar generally eases global financial conditions since many countries have debts denominated in U.S. Dollars.
“On the week, the NZD was 1.8% higher, benefiting from a weaker USD (which was down 0.5%-0.6% in index terms) and a more positive tone to US-China trade negotiations (the offshore renminbi was 0.8% stronger on the week),” says Smyth.
Data from the futures market showing an extremely high level of bearish bets on the Kiwi provided a contrarian signal that the market could rise, and is overly pessimistic.
The more extreme the bearish positioning, the sharper the recovery when sentiment changes and they start panic-closing their bearish bets, or ‘short-covering’ in trade parlance.
“Short covering among investors also likely to have played a role in the NZD’s appreciation last week; the latest CFTC report showed that speculative investors had their largest net short position in the NZD since November last year,” says Smyth.
The improvement in risk appetite is in line with seasonal trends which show a pattern of risk aversion peaking in late August and early September, and then easing.
This appears to be reflected in a recent “shift in mood” in markets, “due to the de-escalation in the U.S./China trade war, the move by Hong Kong to remove the bill for extradition to mainland China, and the lowered odds of a no-deal Brexit,” says Michael Kramer of Mott Capital Management. “Suddenly the dense fog of gloom and doom of last month appears to be lifting.”
More concrete gauges of risk appear to be indicting the trend is changing and risk appetite may be about to recover aiding a rebound in the Kiwi.
The VIX indicator, for example, which measures volatility is looking vulnerable, suggesting financial markets may settle down.
“Now the risk aversion trade may be unwinding. The VIX, for example, had been trading in a range of 16 to 21 throughout August. But as of September 5, that measure of volatility is testing support at 16, and could be heading lower as fears continues to ease,” says Kramer.
Gold is a traditional safe haven many investors goto when markets turn risk averse and it has reached a key resistance level where it could pull-back.
“Additionally, the gold ETF has been rising as fears have been mounting too. But now gold is bumping up against a level of strong resistance at a price of around $149. Also, the pattern in the chart is known as a bump and run, a bearish reversal pattern, an indication that gold is due to fall,” adds Kramer.
Gold’s previously bullish momentum, as measured by RSI, is waning, a sign the commodity risks falling in price.
“Meanwhile, the relative strength index (RSI) is also flashing warning signs as it has been trending lower, despite the price of gold trending higher, a bearish divergence. Should gold fall below the uptrend at a price of approximately $143. It could drop back to support at a price of around $136.50, a decline of about 5%,” says the asset manager.
Taken together these are all positive signs for the New Zealand Dollar which tends to rise when risk appetite improves and fall when markets grow fearful.
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