Pound Sterling Shifts Trend Against New Zealand Dollar, Our Forecast on Where it May Fail

The British pound is showing concrete signs that it is ready to put its recent period of decline against the New Zealand dollar behind it.

The move higher is being driven not by New Zealand dollar weakness but a broad-based pound sterling recovery.

Indeed, the kiwi dollar continues to show some decent form elsewhere, the currency rose sharply against the US dollar as traders continue to bet the Reserve Bank of New Zealand will leave the official cash rate unchanged at 2.25% at its meeting on Thursday.

Understanding the rally in GBP/NZD is quite simple - the British pound was sold aggressively as markets cut back on exposure ahead of the EU vote in June.

This helped the GBP/NZD pair fall from November 2015 highs around 2.3654 down to the 2.1188 levels we are presently seeing.

The sell-off took sterling below fair-value levels against a number of currencies; in short it was oversold and undervalued.

There was always the chance that this scenario would be unwound, what was questionable was when it would happen.

Some thought the rally would come after the referendum, but the smart money always knew that you would have to catch the bottom well ahead of the vote, particularly in light of the fact that opinion polls and odds on an UK exit have not changed much.

The chances of the UK remaining in Europe are set around 70%, and it will take a great shift in favour of an exit to justify the recent lows we have seen.

Where Next for the GBP/NZD?

The GBP to NZD exchange rate has been on an uninterrupted rally for the past six days now in a move that has taken out both the 20 and 50 day moving averages.

This is significant in that it signals a shift in trend in the short and medium terms, importantly the strength of the moves through these barriers has shown even the supply from sell-orders set at these levels was unable to halt the recovery.

We are however wary of the 100 day moving average which lies, at the time of writing, at 2.1384.

Note how the GBP/NZD failed to break above here in November 2015:

In fact the failure to break above here saw such a flood of sterling onto the market that the GBP/NZD then fell like a knife.

Those hoping for a higher GBP/NZD at this stage were further disappointed as it was at this point that markets really caught a chill over the EU referendum.

We would therefore expect any further strength in the pound to stall towards the 100 day moving average at 2.1384.

Note - the MA is directed lower so over subsequent days expect it to exist at lower levels.

New Zealand Dollar Dollar: Interest Rate Cut Could Prompt Selling

What could prompt a break above the resistance zone is another interest rate cut at the Reserve Bank of New Zealand.

There are plenty of good reasons for the RBNZ to consider another cut to 2.00%, including low dairy, subdued inflation and an elevated Kiwi rate above the central bank’s TWI.

However, it is the threat of higher house prices on the back of even lower borrowing costs that are likely to hold the RBNZ back.

The chance of a cut was 50/50 ahead of the weekend, but markets are a little more reticent pricing in a 40% chance.

“While markets have reduced expectations for this week, back to around 40%, a cut by mid-year remains well discounted. Thus any near term NZD support, predicated upon near term inertia, seems merely set to provide better levels to sell the NZD,” says analyst Jeremy Stretch at CIBC in Lonond.