Pound's Rally v New Zealand Dollar Could Come off the Boil

Of all the commodity-linked currencies, the New Zealand Dollar has avoided the worst of the sell-off that has befallen this complex of currencies over recent weeks.

NZD has been spared the pain metted out on the likes of the Australian Dollar due to its link to 'soft commodities' which were not hit by the drop in fuel and metal prices, as well as some resolute domestic economic statistics.

The most important soft commodity to New Zealand is of course milk.

Our technical studies suggest GBP/NZD is consolidating in the 1.87s after a strong rally, but we think there is a high chance it could weaken now and begin a corrective phase due to the bearish signal on the RSI momentum indicator, which has moved below its 70-overbought level.

The RSI has also formed a head and shoulders reversal pattern signaling a probable strong reversal in momentum which is measured as a ratio of up and down days.

This seems to suggest, therefore, that we will see the beginning of an increase in down days.

As such, we favour a bearish, albeit cautiously bearish given the existing uptrend, outlook for the pair.

If it breaks below the 1.8552 lows that could provide confirmation of a move down to 1.8300, however, this is not a conviction call given the still-intact and rather dominant uptrend.

Data, Events to Watch for the New Zealand Dollar

As mentioned, the NZ Dollar was one of the few commodity currencies to perform well in the previous week, after it rose on the back of strong gains in dairy prices and job growth.

The overall strong run of data argues for an optimistic outlook from the Reserve Bank of New Zealand (RBNZ) who’s rate meeting is the ‘star turn’ of this week’s data calendar when it is concluded at 22.00 GMT on Wednesday, May 10.

“The housing market is softer, which the RBNZ wants to see. All of this argues for optimism from the Reserve Bank next week and outperformance for NZD, maybe not versus the USD but certainly against other currencies,” commented Kathy Lien of BK Asset management.

Data, Events to Watch for the Pound

The main release for the Pound is the Bank of England rate meeting and the BOE May inflation report at 12.00 GMT on Thursday, May 11.

No change in policy is forecast because of the ‘purdah’ preventing the authorities from making changes to rules in the run-up to the election.

The BOE may downgrade growth expectations and raise inflation (notwithstanding the recent fall in oil), but according to analysts at Canadian lender TD Securities, the governor is expected to, “steer things back to neutral during the presser.”

Barclays expect the communication to be slightly hawkish, in an effort to boost the Pound and keep inflation at bay. Like TD they also see the bank likely to forecast inflation to rise and GDP to fall, although only in 2017 as falling oil prices will bite in 2018.

“As for the communication, we believe the Committee will be eager to repeat its slightly hawkish message from the February inflation report, keeping the focus on inflation, and banking on the support provided to sterling to mitigate risks of excessively high and sticky inflation. Changes in forecasts will be consistent with such a move sideways as we expect GDP growth to be revised slightly lower but inflation slightly higher.  

Other important data released this week includes the RICS House Price Balance (Apr) at 00.01 on Thursday, May 11, Industrial and Manufacturing Production at 09.30 on the same day and also at 9.30 the Trade Balance in March.