GBP/NZD Rate 5-Day Outlook: NZD Strength Favoured
From a technical perspective, the New Zealand Dollar looks more likely to strengthen against the Pound than the other way around despite the Pound’s recent short-term recovery rally.
We note the probable triangle formation on the weekly chart which seems to be indicating that the pair could at any moment move lower.
Whilst still incomplete, the third wave of the triangle looks like it is peaking and about to rotate lower.
Triangles normally have five waves a-e, and GBP/NZD remains in wave-c.
With wave-d poised to begin descending we look to the four-hour chart for more signs of weakness, however, there is insufficient evidence of a bearish move yet.
The exchange rate remains inside an ascending wedge and although it looks like it is about to descend to the lower borderline, confirmation of a new bearish phase on the weekly chart would require at least a break below the lower border-line on the four hour to signal the beginning of such a phase.
The New Zealand Dollar has strengthened over recent days despite the Reserve Bank of New Zealand telling markets at their March 23 meeting that they believe the currency remains overvalued.
The strong New Zealand Dollar makes New Zealand exports less competitive and this appears to be having a continued negative impact on trade.
Recent data, for example, showed yet more declines in the price of Dry Whole Milk which is the country’s main export, and although it is still elevated from its 2016 lows, it has recently given back over 50% of its gains.
The New Zealand Dollar this Week
The main release in the coming week for the Kiwi is the ANZ Business Confidence Survey in March.
The survey has an inflation expectations subsection, which will be closely scrutinized for inflation pressures.
TD Securities say they will be watching for the trend to rise to 1.7% in February, which could potentially herald a rate increase from the RBNZ.
“We and the RBNZ will be watching for the trend in inflation expectations, rising to 1.7% in the February report. Rising inflation expectations are necessary and sufficient the RBNZ to lift rates.”
Pound Sterling this Week
The UK Government's triggering of Article 50 is likely to be the main event in the coming week; and Wednesday 29 is a likely date.
“We expect GBP/USD to fall quickly when the announcement is made but it should recover swiftly when the inevitable happens and investors finally realise the negotiation process will be long and filled with delay,” says Kathy Lien, managing director at BK Asset Management.
Why Sterling would fall after the event is perplexing in our view - it is clearly well signposted and there is unlikely to be any new information on the outlook.
Any potential drivers for Sterling will come in the succession of events following the triggering of Article 50 - for instance, the Europeans laying out their proposed negotiating timetable. But event here we see little of substance to bother the Pound. It is only when negotiations get underway in earnest will Sterling move.
Analysts at Barclays meanwhile reckon that the triggering of Article 50 could potentially align with a longer-term recovery they expect Pound Sterling to undertake.
“We expect the triggering of Article 50 to initiate a ‘sell the rumour, buy the fact’ rebound in GBP from historic undervaluation as ambiguity over Brexit recedes,” says Marvin Barth, a foreign exchange analyst with Barclays bank in London.
Expect the European Commission to slap a divorce bill on Britain in the early stages of this whole process.
The Commission wants the UK to pay for all its outstanding spending commitments until 2020, which amounts to a bill of 50-60 billion Euros. Needless to say the UK does not agree with the figure.
Why would it the UK pay for a club it is no longer part of? Yes, these spending committments have been made, but they were made under the assumption that the UK would benefit from single market it is helping maintain via spending committments.
The EU wants this issue dealt with ahead of trade negotiations which suggests they don't want the UK to use the bill as a negotiating chip. Understandably, the UK wants the bill and negotiations to run concurrently.
We expect the tug-of-war over these various issues to potentially inject volatility into Sterling markets, but don't see any fundamental shift in direction resulting.
It is the trade negotiations that will be of utmost importance and these will only likely be tackled towards the end of 2017.
On the data front, it is a quiet week.
GDP data is out at 08.30 GMT on Friday March 31 but it is just a third and final revision and therefore highly unlikely to surprise. Growth for the final quarter 2016 is forecast to remain at the 0.7% announced by the ONS previously.
Mortgage Approvals, also out on Friday are not forecast to move much and thus seem unlikely to have much impact on the market.