The Chart Confirming New Zealand Dollar Outlook is Negative Against the Pound

Studies of historical charts confirm the pound sterling is well on its way to reclaim its historical levels against the NZ dollar.

The New Zealand dollar has so far avoided the fate of its commodity currency cousins which have been badly hit by Chinese Yuan devaluations.

However, any strength delivered by the New Zealand against the British pound should ultimately be seen as temporary suggests a new study on the pair.

The GBP/NZD has been on a losing run since 2001 when it commanded levels above 3.7. Losses appears to have now bottomed at 1.80 and a recovery back to longer-term historical levels above 2.50 is playing out.

“GBPNZD has broken out of a multi-year trading range, which meant that is has accelerated over recent weeks. We look at this move and put it into context on a longer-term chart,” says Sheena Shah at Morgan Stanley.

The 32.8% retracement level at 2.51 of the bearish move since 2001 hasn’t yet been reached, suggesting further upside suggests Shah.

GBPNZD is just below the 50% retracement of the recent move since 2006. Its 61.8% retracement is at 2.5845 and provides clues as to where the GBP/NZD is headed - upwards.

As can be seen in the graph a zone between 2.40 and 3.00 represents a significant period of trade in GBP/NZD, our suspicion is that the pair is headed back here in sympathy with longer-term equilibrium.

NZD and Commodity Currencies Undermined

The NZ dollar has thus far avoided the brunt of China's decision to devalue its currency. Where the rand and Aussie dollar has suffered, the NZD has remained relatively firm.

This is of course no guarantee that the NZD is immune - indeed the knock-on effect could yet be felt.

The commodity currency family remains undermined by events in China with week trade data over the weekend prompting a new wave of selling. “Weak Chinese exports at the weekend should keep NZD and AUD capped, in what is an otherwise uneventful session for data. Positioning should ensure dips find demand,” say ANZ Research in a note to clients.

China reported a Trade Surplus of $43B versus expectations of $55B as exports slumped a whopping -8.3% on a year over year basis. Imports also declined by -8.1% suggesting that the broad slowdown in Chinese economy continues.

“The slowdown in China continues to take its toll on the commodity currency block with Aussie, kiwi and loonie all making fresh session lows in morning European trade today. The loonie appears to be especially vulnerable to more declines as oil slips to $43/bbl and any test of the $40/bbl handle in the WTI crude contract could push the pair towards the 1.3500 figure over the near term horizon,” says Boris Schlossberg at BK Asset Management.

Schlossberg believes the news is unlikely to please Chinese authorities who continue to target 7% GDP growth rate this year as they attempt to turn the country's economy towards services and consumer spending rather than industrial production.

Although the latest data points which include weakening PMI numbers as well indicate that PBOC should ease once again - the monetary authorities find themselves in a bind.

“Any cut in rates could cause capital outflows and the country's foreign reserves already fell by $42 Billion in July,” says Schlossberg.