New Zealand Dollar Liable to Further Losses vs. Pound: The Week-Ahead Forecast

GBP/NZD has pulled back but not enough to suggest a reversal of the uptrend, but with many expecting the Reserve Bank to turn bullish next week the pair could fall further as the NZD appreciates. 

The Pound-to-New Zealand Dollar exchange rate has weakened substantially falling rapidly back down to the level of the May highs at 1.8975.

Notwithstanding the steep decline of the last few days the longer-term uptrend remains intact.

The recent weakness might just be symptomatic of a corrective period before the pair resumes its uptrend.

Neither the trendline for the up move or either of the major moving averages has been broken yet so the bias is bullish.

For confirmation of more upside, however, we would ideally first like to see a break above the 1.9436 highs, with a target thereafter at 1.9600.

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Events and Data to Watch for the New Zealand Dollar

The main event for the New Zealand Dollar in the coming week is the meeting of the Reserve Bank of New Zealand (RBNZ) at 20.00 GMT on Wednesday, November 8 and markets will be keen to hear the central bank's take on recent political changes.

Consensus expectations amongst economists are that the Bank will leave the interest rate unchanged at 1.75% but the accompanying statement should offer clues as to how policy-makers see economic activity progressing. Has uncertainty brought about by regime change impacted business activity to the extend that interest rates should stay on hold for longer than previously anticipated?

Messaging of this nature would certainly weigh on the currency we believe. 

However, analysts at TD Securities expects a shift in rhetoric to signal the next move in interest rates will be up, which would help the currency.

This will signal a considerable change from the previous neutral for longer stance.

If higher interest rates are signaled expect a rally in the Kiwi since higher interest rates almost always mean a higher currency as they attract more inflows from foreign investors attracted by the higher returns.

"We look for a shift in rhetoric to suggest that the next move for the OCR is up. We look for a quarter-point upgrade to the Bank’s inflation forecasts across the forward estimates to justify this hawkish stance," say TD Securities in briefing to clients.

Hard Data releases include Dairy Prices on Tuesday, November 7 and Electronic Card Sales on Thursday at 21.45.

New Zealand Dollar: Longer-Term Still Looking Good

Analysts at Commonwealth Bank of Australia have updated clients with their latest directional views for the NZ Dollar, and their assessment will please those hoping for a stronger currency in the longer-term.

"Dairy prices will remain on an upward trend because the global economy is experiencing
its first synchronised upswing for a number of years. This will lead to a further improvement in New Zealand’s terms of trade and balance of payments, supporting the NZD," says Elias Haddad at CBA.

Furthermore, Haddad notes interest rate markets continue to price the next move by the RBNZ as an interest rate increase despite softer inflation while demand for New Zealand Dollar assets remains extremely strong as global central banks and other real money managers continue to increase their exposure to New Zealand dollar portfolio assets.

Events and Data to Watch for the Pound

Above: Michel Barnier and David Davis. (C) European Commission.

Last week saw the Bank of England (BOE) take the momentous step to raise interest rates for the first time in 10-years.

Yet no sooner had the rate hike been announced than the market moved on to the next topic of discussion, which is whether or not the hike was a one-off or a part of a series.

The main determining factor appears to be Brexit uncertainty - if talks go smoothly the BOE is more likely to raise rates again - if not then they will probably err on the side of caution and leave the one rise until a clearer picture of what post-Brexit Britain will be like emerges.

Remember the rule of thumb is higher interest rates = a stronger Pound.

"We agree that a deal is the most likely outcome, and based on this we believe that market expectations for a cumulative 0.5% of additional interest rate rises by mid-2020 look low. Rather we think the MPC would like to follow a path similar to that of the Federal Reserve, which has raised rates by a cumulative 0.75% since its initial hike in December 2015," says Pimco Analyst Mike Amey.

Brexit negotiations commence once again in the coming week with all eyes turning to Friday's press conference to be hosted by the UK's David Davis and the EU's Michel Barnier for clues on progress.

Markets will want to see signs of progress that will allow the progression of talks from issues surrounding the divorce to that of trade. Of particular concern is the securing of a transitional deal, widely expected to last two years.

Businesses want certainty and the transitional period will be critical to providing the stability required to make investment decisions.

“Given the Government’s ambitious timetable, to agree on a transitional period early next year and the future relationship altogether by next October, it is crucial for the second phase of talks to start in January,” says Andrew Wishart, UK Economist with Capital Economics.

All in all, this is to say that in the week ahead news about Brexit will remain a high priority for currency dealers.

As far as the hard data front goes, it is a relatively quiet week with no tier one releases on the radar.

The first release is the BRC Retail Sales Monitor released just after midnight on Tuesday, November 7.

This will provide an up-to-date snapshot of the most recent retail sales activity.

Next, we have Halifax House Prices out at 08.30 on Tuesday and is followed by the House Price Balance from the Royal Institute of Chartered Surveyors, just after midnight on Wednesday, November 8.

On Friday Industrial and Manufacturing Production data for September is released at 9.30, with the former expected to come out at 0.3% versus 0.2% previously, and later suggesting a 0.3% versus 0.4% previously.

The Trade Balance is released at the same time and is expected to show the deficit narrow to -12.8bn from over -14bn previously.