Pound Breaks New Zealand Dollar's Resistance, Forecast to Attempt 2.40

The NZ dollar has suffered heavily at the start of November ensuring the trend higher in the GBP to NZD conversion remains valid.

The recovery off October lows at 2.24 has typically been thwarted by resistance at 2.29 though ensuring the pair has trended sideways for the past four weeks.

The breach of 2.29 appears to have now occured and this could well attract further buying interest as traders see a major hurdle being cleared. 

The next obvious resistance point is set at 2.40, we target a move to here through November.

Why is the New Zealand Dollar Lower?

The kiwi was the worst performing currency on the 4th of November as the currency fell sharply following the release disappointing dairy auction prices and underwhelming labour market numbers.

According to Fonterra dairy prices fell 7.4% in what represents the largest decline in 3 months.

The market are particularly attuned to the dairy price at present with a recent rally in the New Zealand dollar being driven by an uptick in prices. Likewise, we saw the NZD's recent rally put to an end by a sudden decline in dairy prices in October.

Longer-term forecasts for the NZD are broadly negative with a growing recognition that one of the worst El Nino events in decades could prompt a serious drought that will further hamper this key export.

Looking at the other worry for the kiwi dollar was news that the unemployment rate rose to 6%.  

Economists were looking for employment to rise by 0.4% but instead it fell by the same amount.

The participation rate also dropped to its lowest level since Q4 of 2013 while private wages and average hourly earnings slowed.  

"These reports reinforces the Reserve Bank's concern about the sustainability of the stabilization in dairy and keeps the door open for another rate cut from the RBNZ," notes Kathy Lien, a director with retail trading specialists BK Asset Management. 

The British Pound: Outlook Remains Firm

November has meanwhile started in bullish fashion for the UK currency thanks to a string of consensus beating economic releases.

It was three out of three for the PMI series with services, construction and manufacturing all beating expectations.

UK economic growth remains robust and with inflation forecast to start picking up over coming months the case for a Bank of England interest rate rise has grown steadily.

Where New Zealand faces a downward slope in terms of interest rates, the opposite is true of the UK.

This divergence in interest rates will continue placing upward pressure on the GBP to NZD exchange rate.