New Zealand Dollar Sharply Lower vs British Pound at Start of New Week - Next Targets Amidst Government Uncertainty
GBP/NZD has jumped sharply at the start of the new week after the country's elections yielded no outright winner.
The uncertainty posed by the inconclusive outcome has weighed on the New Zealand Dollar.
The final results are likely on October 7, but preliminary results showed Prime Minister Bill English's ruling National Party securing 58 of 120 parliamentary seats.
Labour, led by Jacinda Ardern, won 45 seats, while New Zealand First and the Green Party obtained 9 and 7, respectively.
"At a time when the economy is not quite firing on all cylinders, a lengthy period of policy uncertainty or potentially fractured political arrangement would not be positive," says Cameron Bagrie, Chief Economist with ANZ.
New Zealand First must now form a coalition with either National or Labour, placing the spotlight firmly on New Zealand First leader Winston Peters.
The inconclusive outcome has weighed heavily on the New Zealand Dollar with the Pound-to-New Zealand Dollar exchange rate rising 1.51% to 1.8640.
The New Zealand-to-US Dollar exchange rate is down 0.85% at 0.7263.
ANZ are optimistic a stable government will nevertheless form with a National / NZ First coalition being the most likely scenario given the incumbent party’s (provisional) 46% vote share; "that’s a firm mandate to lead," says Bagrie.
Next Targets
From a technical perspective the pair is going sideways at the moment like many Sterling crosses.
The bull flag pattern observed on the major pairs is not as clearly delineated on GBP/NZD making me hesitant to draw any conclusions from it.
Nevertheless, the short-term trend is still ‘up’ and since the 'trend is my friend until the bend at the end,' as the saying goes, it will probably extend higher, with a break above the current 1.8745 highs leading to a move up to a target at 1.8900.
Yet we would like to make it clear that this is not a conviction call as the 50-week moving average at 1.8756 is situated just above the recent highs and will probably prevent further gains, and may even reverse the trend, since moving averages sometimes act as dynamic levels of support and resistance, and provide major turning points on charts.
On the daily chart a move higher looks relatively easy to achieve, however, recourse the weekly chart shows how there is a thick layer or zone of resistance (red hatching) directly above the pair made up of the May 2017 highs at 1.8975 and the aforesaid 50-week moving average.
These levels are likely to present tough obstacles to the progress of the uptrend higher and we see the potential for a reversal at these highs and a correction back down.
Get up to 5% more foreign exchange by using a specialist provider by getting closer to the real market rate and avoid the gaping spreads charged by your bank for international payments. Learn more here.
Data for the New Zealand Dollar
The main focus for the Kiwi over the next five days is likely to be how the election results impact on the currency but as far as hard data goes, the NZ trade balance (Aug) is out at 17.45 BST on Monday September 25, and is forecast to narrow on a yearly basis to 2.9bn from 3.2bn in August of 2016.
Wednesday sees the meeting of the Reserve Bank of New Zealand (RBNZ) to decide the interest rate.
The Kiwi could sell off versus other currencies following the RBNZ meeting as the central bank is more likely to take a cautious line compared to the generally more hawkish stance of most G10 central banks argues BK Asset Management’s Kathy Lien.
“Since the last monetary policy meeting in August, we’ve seen improvements and deterioration in the economy. Inflation and housing activity seem to have ticked up slightly but credit-card spending and service-sector activity slowed. The currency is trading marginally weaker. The bottom line is there hasn’t been enough improvement or deterioration for the RBNZ to change its guidance and if it maintains a cautious outlook, NZD will end up selling off against currencies where rate hikes are anticipated,” says Lien.
Events and Data for the Pound
The fourth round of EU-UK Brexit negotiations commence on Monday, September 25.
The talks follow Prime Minister May’s Florence speech, with its 2-year transition and chief EU negotiator Michel Barnier’s moderately positive reaction to the speech, seems to be biased to supporting rather than undermining Sterling.
Negotiators are set to brief the press on the outcome of this round of talks on Thursday and the key for currency markets will be whether Barnier indicates he believes progress is being made.
The worst possible outcome for Sterling would be a disruptive Brexit - where negotiations fail to deliver a credible trading relationship between the EU and UK when the UK exits the Union in March 2019.
The first round of talks that see legacy issues and the practicalities of the exit dealt with must be cleared before talk of the trading relationship begins.
Also ahead, speeches by Bank Of England’s Mark Carney on Thursday and Ben Broadbent on Friday could provide potential focal points for Sterling traders.
The current market view is that the BOE is embarking on a tightening cycle with analysts now even pencilling in the likelihood of a November rate hike; and the speeches need to be read in light of that more hawkish backdrop.
Markets presently assign an 80% chance of a November rate rise.
Clearly an increase in hawkishness via stronger confirmation of a November rate move by either speechmaker would lead to fresh gains for the Pound, which is positively correlated to interest rates.
Data-wise, the next most significant release could be the Current Account for Q2, at 9.30 BST on Wednesday, September 27, which is forecast to show a slight reduction in the deficit to -15.8bn from -16bn in Q1.
A deeper contraction could help the Pound.
At the same time as the Current Account data is released Business Investment data will also be released for Q2 and will offer a further insight into the strength and resilience of the economy.