5-Day Pound-New Zealand Dollar Outlook Confirms Tight Range Likely to Break Soon
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- GBP/NZD potentially completing a triangle pattern which will probably breakout soon
- Uncertainty as to whether the break will be higher or lower
- The main release for the Pound is inflation and wage data; for NZD producer price inflation
One Pound buys 1.9384 New Zealand Dollars on the interbank market at the time of writing, a cent higher than the previous week's close.
Last week saw an eventual recovery for the rate after Sterling rose on rumours the EU is planning to make a compromise to help negotiate a Brexit deal.
The New Zealand Dollar is unlikely to recover much given limited interest rate expectations; last week the Reserve Bank of New Zealand's governor said he did not expect to have to put up interest rates until 2020 - much later than the 2019 the market had expected, and the Kiwi lost ground as a consequence.
Higher interest rates are supportive of a currency as they increase foreign capital inflows drawn by the promise of higher returns.
From an overall technical perspective the Pound-to-New Zealand Dollar rate remains stuck in a tight range in the 1.92-93s which has formed into a triangle pattern.
The upper and lower boundaries of the triangle are reinforced by the 50 and 200 week moving averages (MAs). These are formidable obstacles for the exchange rate to overcome and likely to make any breakouts more difficult.
Large moving averages attract short-term technical traders who tend to fade the moves as they approach the MAs - they are often repulsed as a result.
Despite these impediments, the chance of a breakout is high since the triangle has now completed its minimum compliment of five constituent waves (labeled a-e). This is the minimum number required to complete a triangle. On rare occasions they form 9 component waves.
The triangle is likely to breakout soon - the fact that the prior trend was bullish suggests a slight bias to an upside breakout.
Unfortunately the fact that component waves of the triangle pattern are steeper on the way down than up, suggests underlying weakness, which favours a downside breakout. Thus there is evidence supporting both a break higher and lower.
If the exchange rate breaks higher, confirmed by a move above 2.00, then it will probably extend to the upside target at 2.0400.
If it breaks below 1.8900 it will probably go all the way down to a target at 1.8200.
These targets are generated by extrapolating the height of the triangle at its widest part, by a ratio of 0.618, from the breakout point.
0.618 is known as the 'golden ratio', a mathematical constant found to govern proportionality in natural phenomena and financial market price series.
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The New Zealand Dollar: What to Watch
A quiet week is envisaged for the Kiwi with the main release producer inflation for Q2, or 'factory gate' inflation, or PPI as it is also known, out at 23.45 B.S.T on Thursday, August 16.
The data will probably feed into expectations about interest rates.
In last week's Reserve Bank of New Zealand meeting governor Orr was seen as relatively upbeat about growth and inflation, even if he saw the latter following a 'bumpy' trajectory, and the former slowing.
Yet the overall takeaway for the Kiwi was negative as Orr said the Bank was not considering raising rates until 2020, pushing back the previous forecast from 2019.
Investors will eye PPIs for a heads up into pressures on broader inflation expectations.
Another factor potentially impacting on the Kiwi is the threat of an escalation in trade conflicts which could cause a slowdown for the global economy.
New Zealand is a highly export-orientated economy and if global demand for its goods falls it will impact on the economy negatively as well as on aggregate demand for the Kiwi, which will depreciate as a result.
Sterling: What to Watch this Week
Brexit headlines could be on tap over the next week with EU/UK negotiations resuming on Monday and recent media stories have reported a conditional willingness on the part of EU leaders to accept Theresa May’s plan to aim for a free trade zone in goods, which could be discussed at a special EU Summit in Salzburg next month.
We note this to be one reason why downside damage to Sterling could have been worse.
"This could help to stem further Sterling selling pressure," says George Brown, an analyst with Investec.
We will keep an eye out for any media set-pieces from the main negotiators.
On the calendar, the Pound has three main data releases in the week ahead, the first of which is wage and employment data for July, out on Tuesday, August 14 at 9.30 B.S.T.
Current expectations are for average earnings to come out at 2.5% - the same as in June; and for the unemployment rate to also remain the same at 4.2%.
The next major release is inflation data, also for July, out on Wednesday at the same time. Headline CPI is expected to show a 2.5% rise compared to the same time a year ago, but a -0.1% fall compared to the previous month of June. Core inflation which excludes volatile food and fuel components is forecast to show a 1.9% rise compared to a year ago.
"If inflation turns out to be more robust than expected, then this will fuel speculation over further rate hikes from the Bank of England," says a note from brokers Actionforex.
The inference is that this could also support the Pound since higher interest rates tend to increase foreign capital inflows due to the higher return promised.
"Inflation may rise more sharply in the coming months as the weakness in the exchange rate will likely push up import costs. If the pound’s weakness persistence then in the long-term this should help to boost exports, assuming Britain will strike a good deal with the EU. So whichever way you look at it, sterling will probably make a good comeback in the longer term outlook," add Actionforex.
The final major release for the Pound is retail sales in July out on Thursday, also at 9.30.
Broad, headline retail sales are forecast to show a 2.9% rise compared to a year ago and 0.2% compared to the previous month of June (month-on-month).
Core retail sales, which excludes auto sales and fuel is forecast to rise 2.8% on a yearly basis and 0.2% month-on-month.
Despite the important data on schedule in the week ahead its important to note that broader political and macro themes may be more dominant.
The Pound shrugged off a recent interest rate hike by the Bank of England and fell on Brexit fears anyway, and on Friday it was more moved by Turkish themes than domestic data which was positive, as macro themes dominated its main counterparts and somewhat overshadowed the data.
Domestic economic numbers released on Friday showed GDP expanding by 0.4% quarter-over-quarter in Q2 and construction output surging 1.4% month-over-month in June.
The data had little impact on Sterling which was instead focussed on external drivers like broad-based Dollar strength and the Euro's Turkish-generated woes.
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