Pound-to-New Zealand Dollar: Further Upside Towards 2.04 Target Forecast

Image © Filipe Frazao, Adobe Stock

- GBP/NZD has broken clearly out of long-term range

- Eventual target at 2.0400 probable

- Kiwi Q2 GDP takes centre stage this week

Last week marked a momentous change in the trend of the Pound-to-New Zealand Dollar exchange rate after it finally broke out of the narrow range it had been trapped in since November last year.

Although an initial break occurred in the week before that it was not confirmed until the pair rose clearly above the 200-week moving average (MA) at 1.9730 and accelerated higher.

The pair made a weekly high of 2.0004 and will probably continue rising in the week ahead as it has not yet reached its probable upside target, calculated by extrapolating the height of the triangle at its widest part higher by 0.618 , which is the classical technical method for establishing targets.

Such a method yields an upside target of 2.0400 and we expect it to reach there assuming a break above the current highs signals a continuation.

The RSI momentum indicator in the lower pane is corroborating the exchange rate by also rising quite steeply. This also suggests more gains are on the horizon.

Over the last three weeks the pair has formed long green up-candles and taken together these make a 'three white soldiers' Japanese candlestick pattern, which is interpreted as a bullish indicator for the exchange rate, and further enhances the upside forecast.

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The New Zealand Dollar: What to Watch

The main economic release for the New Zealand Dollar in the week ahead is Q2 GDP data which is expected to accelerate by 0.8% compared to the 0.5% previously.

On a year-on-year basis it is forecast to show a 2.5% growth rate compared to 2.7% in Q1, when figures are released at 23.45 B.S.T on Wednesday, September 19.

"Second-quarter GDP numbers are due from New Zealand next week. Despite the decline in dairy prices, stronger retail sales and trade activity should bolster growth in Q2," says Kathy Lien, managing director and co-founder of BK Asset Management.

A stronger-than-expected reading is likely to be positive for the Kiwi whilst vice versa for a weaker-than-forecast reading.

"Strong GDP growth reduces the chance of a rate cut by the RBNZ that has been partially priced into the one-year OIS (chart 1). This implies some upside to NZD/USD and downside to AUD/NZD," says Joseph Capurso, Senior Currency Strategist with Commonwealth Bank of Australia.

Another key release for the Kiwi is the global dairy trade auction on Tuesday at 13.00.

The auction establishes prices for dried whole milk powder among other things, which is important for the New Zealand Dollar because it is New Zealand's largest export.

The price of dried whole milk has declined markedly since the start of 2018, with a negative effect on farmers and the economy, if it continues lower it could start to weigh on the Kiwi too.

Analysts at Kiwi lender ASB expect whole milk powder prices to fall by 1-3% because of higher supply as New Zealand production approaches its seasonal peak.

The Westpac Consumer Sentiment gauge is also out on Tuesday at 23.00 and the current account for Q2 is expected to show a deficit of 1.32bn when it is released at 23.45. Deficits are usually seen as negative for a currency, although the correlation is variable.

A background risk factor for the Kiwi is evolving China-US trade tensions and these could escalate in the week ahead if talks break down and Trump goes ahead with his proposed tariffs on an extra $200bn of Chinese imports. Such an outcome would have a negative impact on the Kiwi.

"Trade headlines will continue to pose a risk to both currencies (AUD and NZD) as the U.S. threatens China with additional tariffs while proposing a new round of talks. Both currencies turned lower on Friday, shifting momentum back to the downside," says Lien.

The Pound: What to Watch this Week

Sterling has made a decisive recovery in September as the terms of reference of the Brexit debate have undergone a dramatic change.

Whereas previously they were somewhat polarised into the Chequers proposal on the one hand and a 'no-deal' pure Brexit on the other the gap now appears to have closed.

Now even 'die hard' Brexit purists appear to be advocating a deal based on the EU's deal with Canada - known as a 'Canada plus' deal - whilst Chequers, and even continued membership of EEA is being considered as the soft option avoiding the most economic disruption.

We heard from analysts at Nordea Markets in the week past that the Pound should actually rise under all Brexit scenarios, but expect a bloodbath if a 'no deal' arises.

The bottom line for the Pound is should the probability of a 'no-deal' continue to diminish the currency should see more gains.

"Brexit talks between the UK and the EU are expected to be stepped up in the coming days with the topic likely to dominate the informal summit of EU leaders in Austria on September 20. Sterling should therefore continue to see high volatility as it remains sensitive to Brexit headlines," says a note from forex broker XM.com.

On the hard data front, meanwhile, there are also some notable releases in the week ahead including inflation figures for August and retail sales.

Headline inflation is forecast to dip back to 2.4% in August (from 2.5%) on a year-ago comparison basis, while the core rate is predicted to fall to 1.8% from 1.9% previously (year-on-year).

Analysts are overall a bit downbeat about the prospects of economic data in the week ahead so surprises to the upside would be likely to drive the Pound higher, whilst those to the downside might weigh but to a certain extent will already be accounted for.

"Next week’s indicators may not be as positive and could fail to provide support for the pound in case the Brexit negotiations were to break down," says XM.com, "CPI figures will be watched on Wednesday for evidence that inflationary pressures in the UK continue to edge lower towards the Bank of England’s 2% target."

The other hard data release is retail sales on Thursday which is forecast to show a 0.2% month-on-month contraction in sales in August after a 0.7% bounce in July.

The overall assessment for UK data is that it remains 'sluggish' and more at risk of decline than growth.

Regardless of data no-one expects the Bank of England (BOE) to raise rates until Brexit is clarified.

Since interest rates are the main driver of foreign exchange - pushing the Pound up if they are hiked - the currency is ultimately at the mercy of Brexit negotiations rather than data, since everything hinges on the terms of divorce.  

Put a different way, pure economic data is not the main consideration of when the BOE will next raise interest rates, and as such has less impact on the exchange rate. Indeed, this appears to have been the message from last week's September Bank of England policy decision.

"While inflation has started to come back down to earth and retail sales have firmed, economic growth in the U.K. has remained sluggish, with real GDP rising 1.5% annualised in Q2. Given slower economic growth and ongoing Brexit negotiations, we look for the Bank of England to remain on hold in coming quarters until these concerns subside," says a note from analysts at investment bank Wells Fargo.

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