GBPNZD Research Paper
Having traded to a multi-year high of 2.50+ in August, and 2.45+ in September, we have seen GBPNZD correct over the course of October and enter a consolidative phase.
This has been due to a combination of factors, including disappointment over the lack of a rate cut from the RBNZ in September, an improvement in dairy prices and a pushing back of the likely timetable of a UK rate. This move was given added impetus by the fact the FED did not raise interest rates in September so traders sought high yielding assets once more.
The data from the UK has been slightly disappointing, with the Bank of England seemingly back peddling from a UK rate hike the MPC still voted 8-1 to leave rates on hold but Mark Carney pushed the time frame for a likely rate hike back in his accompanying statement.
With UK CPI inflation posting a 0.1% decline and GDP missing estimates, then it is not that surprising the timeframes have slipped. One bright note in the UK data was retail sales, however this increase may well be a transitory benefit of hosting the rugby world cup.
The RBNZ also left interest rates on hold in October, however the accompanying statement was a touch more dovish than expected. The RBNZ whilst deeming it appropriate to leave rates on hold, but they did feel it was likely they would cut rates further in due course. This should weigh on the dollar as this approaches.
We have seen GBPNZD complete between a 38.2 and 50% correction of the move from the April low to the August high before finding support in the 2.25 region. In a trending market we would usually expect the price to correct between 38.2 and 61.8% of the proceeding move so this is not that unexpected. Over the last 2 weeks or so we have seen GBPNZD settle down into a trading range between 2.25 and 2.30 which I would tend to view as a period of consolidation prior to seeing a resumption of the longer term uptrend. Given the speed of the move over the last 6 months, it is probably a good thing we’re seeing such a period as it will make the move more sustainable over the long term. The fact we have seen the corrective downtrend broken earlier this week adds weight to the idea we’re currently consolidating.
For the time being resistance can be found at the 20 day moving average (approx. 2.285 as we speak), the market has not managed to close above here since slipping below this on the 22nd
of September. If we can close above this level, then 2.30 is the next level of resistance a break of which should target the upper Bollinger band this also coincides with first Fibonacci level (2.326). The Bollinger bands are starting to narrow once more (although they could still narrow a lot further), but this does point to a period of heightened volatility going forward.
It really depends on time frames. If you’re looking to trade in the short term, then targeting rates below 2.30 seems sensible. If you have a bit of time on your side, then targeting prices in the 2.30, 2.35 or 2.375 region seems sensible. With a long term time horizon, then targeting rates below the 6 year high of 2.50 would be appropriate. Only a break below the recent lows of 2.25 would negate this strategy as it would suggest the correction has further to go.
At the present, the market is finding support at 2.25 and this looks like it will underpin the market. Whilst, I appreciate how frustrating it must be to have seen the market move 30% against you in 6 months you’re 10% better off now than 2 months ago. With this in mind, I would consider covering a significant portion of your requirement around current levels and seeing what happens (just in case). If the market breaks above 2.30 then I would suggest converting the balance of your funds as this points to the uptrend resuming.