GBP/NZD Downmove Stalls After China Downgrade

The Pound to New Zealand Dollar (GBP/NZD) stalled in its new downtrend midweek after Moody’s downgrade of China dimmed the outlook for New Zealand’s largest export destination.

Moody’s lowered China's credit rating a notch to A1 (the fifth from top) because of concerns about the country’s large debt-pile and heavy reliance on credit.

China is a major importer of New Zealand milk which it needs New Zealand Dollars to buy, but a significant slowdown could reduce demand.

On the milk front the news is however good with mid-week seeing New Zealand milk co-operative Fonterra releasing supportive forecasts for milk prices.

Fonterra increased its cash payout in 2018 to a relatively generous 6.5 NZ Dollars per kilogram, whilst the 2017 payout was also raised to $6.15/Kg,

This combined with impressive trade data helped bouy sentiment towards the currency.

Despite this hiccup, the new down-move in GBP/NZD is expected to continue, both from a technical and a positioning standpoint.

The number of short contracts on the Kiwi is at extremes, which means investors are exceptionally bearish the currency.

“Short NZD is the most stretched short position in G10 FX,” say Bank of America Merrill Lynch Global Research in a note advising investors to buy the NZD versus the JPY.

The way positioning works as an indicator is that when extremes are reached, against expectations, the market often actually turns around and goes in the opposite direction.

In this case, an extreme short NZD position would actually be an indicator to go long or buy the Kiwi.

Meanwhile, the charts show a probable reversal of the trend took place after the pair broke out of the recent consolidation and fell to 1.8390 lows.

A break below these 1.8390 lows would probably lead to a move down to a target at 1.8335 where the 50-day moving average is situated and likely to provide robust support.

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