Central Bank policies continue to dominate

New Zealand Dollar Research Report

Central Bank policies continue to dominate

Sterling New Zealand Dollar (GBPNZD) FX Technical Analysis

GBPNZD has come under pressure since the last research paper was published, having initially rallied and running out of steam in the 2.083-2.084 region. We have peaked in this ball park on a couple of occasions over the last couple of months which is proving a bit of a concern.

As discussed in the last research paper, central bank policy has been a key driver in exchange rates movements over the last few months and this has indeed been the case of late. The RBNZ left interest rates on hold at 3.5% in March and maintained a neutral stance, noting that the next rate move could be up or down. The RBNZ have forecast that interest rates are likely to remain on hold in NZ until Q1 of 2017 at the earliest, assuming that there is no significant depreciation of the exchange rates from current levels.

However, if oil continues to fall and leads to a decline in inflation expectations then a cut in interest rates could be needed.

Overall, we would expect rates to remain unchanged throughout this year at the very least. The RBNZ remain positive over the domestic economy, suggesting lower petrol prices have increased spending power, whilst upbeat employment and construction data are also positives. With the major headwinds/drags on growth being “drought conditions in part of the country, fiscal consolidation, reduced dairy incomes and the high exchange rate”.

The central bank sees the current strength in the kiwi as unjustifiable and unsustainable, but this has not changed over the last few years.

In the UK, we have seen the likely timetable for a UK rate hike (one of the key drivers of sterling strength over the last year or so) pushed back as UK inflation continues to fall. UK CPI inflation has fallen to a record level of 0%, this move has largely been driven by the falling oil price. The drop in inflation has lead the Bank of England’s chief economist to suggest that it was 50/50 as to whether the next move in UK interest rates would be higher or lower.

I would tend to agree with Mark Carney’s original statement, that it would be “foolish” to cut interest rates in order to fight off this current bout of deflationary pressure. After years of letting inflation run at 4-5% (largely due to the sky high price of oil) and doing nothing about it, it seems a bit rich to raise interest rates now consumers have finally got some relief and living standards are improving once more.

It is also worth mentioning the UK election at the start of next month, the uncertainty surrounding this is likely to weigh on sterling so bear this in mind.

Technically

We have seen GBPNZD fall from 2.0833 to 1.9379 over the course of March, falling to just shy of the year low 1.9248. The market traded to this level earlier this year and subsequently rallied to 2.0934. We’re appear to be rallying from the lows once more, so I would be tempted to see how this current move unfolds. One note of concern however, is the fact that each subsequent rally so far this year has left a slightly lower higher i.e. 2.0934, 2.0844 and then 2.0833. This suggests there does not appear to be much appetite for the testing the multi-year high of 2.104 once more. We’re currently encountering resistance at the 20 day moving average (2.00), this is also a round number so we may struggle to break this level on the first attempt.

Buyers

As the market has been setting lower highs on the recent rallies, I would recommend targeting prices below the 11th March high (2.0833) making 2.06 a sensible target. If you’re concerned that the rates may fall further, then I would recommend a stop loss order below 1.9248 as this has underpinned the market for over a year.

Sellers

We look to be heading higher at this stage, but I would not panic as we have seen moves of this nature on numerous occasions. As long as the market remains below 2.1040, I would argue that we remain in the ranges of the last few years and better rates may be achievable. If you have a short term time horizon then I would consider making your move ASAP as we look to be heading higher initially but if you have time on your side placing an order in the 1.96-1.95 region seems sensible as it is above the recent low of 1.935 and the annual low of 1.925.