Pound / New Zealand Dollar: Now @ 10-Month Lows; Down-Trend Ingrained

Pound / New Zealand Dollar: Now @ 10-Month Lows; Down-Trend Ingrained

3 April 2016, 12:59
Vasilii Apostolidi
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The pound to New Zealand Dollar remains in a solid down-trend in the medium term.
There is no technical evidence this down-trend may be reversing so it will probably continue.

Friday April 1 witnessed the formation of new 10-month lows at 2.0557.

A break below these will probably result in a continuation down to the S1 monthly pivot at 2.0490.

Monthly Pivots are powerful levels where the exchange rate often stops to consolidate, bounce, or even reverse trend in some cases.

Trader’s use them to fade the dominant trend, scalping short-term bounces.

It is therefore likely GBP/NZD will find support and pause at the S1.

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GBP to NZD conversion rate

A break clearly below the S1, however, signalled by a break below 2.0440, would probably confirm a continuation lower to the next target at the 200-week moving average at 2.0264.

Moving averages are widely followed by market participants, money managers and investors.

Again they can become focal points for increased trading activity as bulls and bears wrestle over the direction of the next break, thus the pair will likely pause at 2.0264.  

Overall, despite the apparent lack of bearish conviction in the recent leg down, as evidenced by the low momentum and volume indicators in the lower panes (a possible seasonal effect due to Easter holidays), our view remains that there will be more downside to come.

 Data Hot-Spots in the Week Ahead

There is little data of consequence from New Zealand except NZIER Business Confidence, which came out 10% in the previous month.


The NZIER index is released by the New Zealand Institute of Economic Research and shows the business outlook in New Zealand.


It is a short term indicator. A rise in the index indicates increases in business investment that lead to higher levels of output.


Thus, a high reading is seen as positive (or bullish) for the New Zealand Dollar, while a low reading is seen as negative (or bearish).


Most of the data of consequence for the pair will be from the UK.


Monday April 4 sees the release of Construction PMI, which is expected to decline further to 54.0 from 54.2 in February. This would be in line with the general down-trend, and would also constitute a more than 18-month low for the metric.


The key data release for the UK comes mid-week when the Services PMI figures are released. Services account for in excess of 80% of UK economic output, it goes without saying this will be a much-anticipated release.


RBNZ Rate Cut Ahead?

The continued appreciation in the New Zealand Dollar (kiwi) has led analysts at ANZ bank to speculate that the Reserve Bank of New Zealand (RBNZ) could cut interest rates in the not too distant future, and that they may cut up to half a percent of them during 2016.


The current base interest rate as set by the RBNZ is 2.25%, which is well above most other G10 nations.


This helps explain the kiwi’s rapid rise, which is being fuelled by investors relocating their capital to New Zealand to enjoy the higher interest rates offered there.


The strong kiwi is a problem for New Zealand exporters, as an expensive New Zealand dollar makes their exports less competitive and less affordable for some.


This, and the combination of the economic plateauing in China, which was a major importer of New Zealand dairy products catering for China’s westernising diet, has meant a decline in New Zealand’s  key exports (Dairy products are the country’s greatest export).


“For exporters the run back up above NZDUSD 0.69 and to 73.3 on the NZD TWI is proving eye watering. For dairying, the sector under the most pressure at present, the run back up is especially painful as a lower NZD is a key reason that a better income outlook in 2016/17 has been flagged. If this doesn’t prove to be the case there will be serious industry concern,” say ANZ.


ANZ conclude that the pressure on Dairying and other exports will lead to the RBNZ to eventually cutting interest rates, in order to weaken the kiwi.


Despite resolute growth in many other sectors from Forestry to Tourism offsetting the pain from Dairying, the note concludes that the threat of an appreciating kiwi to exporters and the country’s primary industry, will force the RBNZ to cut interest rates by a half a percent during 2016.

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