GBP/NZD 5-day Forecast: Selloff Reaching Exhaustion Point

• GBPNZD oversold on daily chart
• Look for rebound and consolidation
• NZD under pressure on Chinese market selloff

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The Pound to New Zealand Dollar exchange rate (GBPNZD) can consolidate following a period of losses that have left it deeply oversold.

NZD has rebounded in strong fashion against a struggling Pound Sterling through the August-September period, courtesy of improved sentiment towards China and a string of better-than-expected New Zealand data releases.

These include last week's upgrade to GDP figures that means the economy did not, in fact, slide into recession at the start of the year as well as a second consecutive above-consensus dairy auction.

But the new week starts with the New Zealand Dollar tracking the Australian Dollar lower amidst renewed fears about the outlook for China's property sector, serving as a reminder that the near-term direction of the NZD could lie with the world's second-largest economy.

"There is little on the data calendar in New Zealand this week so the NZD is likely to continue being driven by its beta to risk, Chinese sentiment, and agriculture prices," says Noah Buffam, an analyst at CIBC Bank.

The Aussie Dollar is the G10 laggard following a widespread selloff in Chinese property stocks, which declined by the most in nine months, over concerns about a possible China Evergrande Group liquidation which adds to fresh signs of stress across the industry.

Evergrande - the mega-developer - dived 25% after it scrapped key creditor meetings at the last minute and said it must revisit its restructuring plan. China Aoyuan Group Ltd. was however the biggest faller, slumping by a record 76% after shares resumed trading.

New Zealand is not directly exposed to the Chinese property sector to the same extent as Australia, but the two currencies have a strong correlation as New Zealand is highly exposed to the broader Chinese economy via its agricultural exports.

The GBPNZD recovery coincides with the pair reaching oversold status on the daily chart:

Above: GBPNZD at daily intervals with the RSI. The pair has gone from overbought to oversold and some consolidation is called for.

The lower panel is the Relative Strength Index (RSI), a momentum indicator, that has fallen below the 30 level which indicates oversold conditions.

The Chinese-inspired selloff in the NZD and AUD could offer the fundamental trigger to the rebalancing required by the overextended RSI and we therefore look for a consolidation or rebound in GBPNZD.

Note how the RSI surged above 70 in August, which meant it was considered to be overbought. The RSI stayed true to form and corrected back into the range as the GBPNZD fell back down to earth from multi-year highs.

Could the current pullback be, in part, due to a correction from overbought conditions? Yes, would be the answer, although it appears that the correction has now overshot the mark.

Domestically, the New Zealand calendar is quieter following the deluge of the previous week.

Above: NZ business expectations data will be watched this coming week.

We will nevertheless keep an eye on New Zealand's monthly employment indicator for signs of emerging slack in the economy.

The data is due for release on Sept. 28 and is drawn from income tax data, "making it a fairly comprehensive record of the number of people in work," according to a note from Westpac.

"Job growth was very robust over the first half of 2023, with a surge in migrant inflows allowing employers to fill longstanding vacancies. However, the weekly snapshots provided by Stats NZ suggest that the uptrend has slowed in recent months and so we expect only modest growth to be reported for August," adds the note.

The market is looking for signs the Reserve Bank of New Zealand might have to raise interest rates again, and employment figures will be key to this, meaning the release should be of interest, even if any market impact will be relatively subdued.

Also due on Thursday is the release of the ANZBO business confidence indicator where an improvement on the previous –3.7 is hoped for.

"While still low, business confidence has been pushing higher in recent months, climbing to a two-year high in August. Businesses’ expectations for their own trading activity has also been improving. That’s despite the continued pressure on margins," says Westpac. "We’ll be watching to see if the lift in business sentiment continues in September."