GBPNZD Research Paper
We’re seeing a combination of NZD strength and GBP weakness. The Kiwi dollar has improved as dairy prices have bounced off their lows (up 40% from August when it was at a 10 year low), this is important as it makes up 35% of NZ exports. Also I think we’re seeing a move back into higher yielding currencies as risk appetite returns to the market. It’s widely expected that the ECB will cut interest rates this Thursday which will boost investor sentiment, increasing demand for stocks and also boosting carry trade activity from EUR to AUD and NZD so it’s quite conceivable that the Kiwi dollar will remain in demand pushing GBPNZD lower.
The pound's had a tricky month, Mark Carney, Bank of England Governor was downplaying the chances of an early interest rate increase and stressed that rates will remain low for some time. Expectations are that UK won’t see a rate hike now until late 2016 and with ongoing flat inflation readings the pound’s down across the board.
The main event risk for the Kiwi itself is the RBNZ December interest rate meeting which takes place next Thursday 10th
morning (Wed 9pm if you’re in the UK). Futures market indicates that there’s only a 30% chance of a rate cut by 25 basis points so it’s not a certainty. There’s going to be increased volatility around the decision particularly if the majority of the market are expecting the central bank to stand pat. As usual the accompanying policy statement will provide clues to if/when further monetary easing/tightening may occur.
So it’s probably worthwhile positioning yourself to take advantage of any favourable swings in the exchange rate, as well as protect yourself against any adverse move in prices. I know I go on and on about stop loss orders in these reports but honestly they can be very useful tools. Speak to your Halo consultant about the best level to place your stop loss order :)
After GBPNZD topped out at 2.50 in August, corrected lower down to 2.24 in October and recovered up to 2.37 in November, the failure of prices to bounce back to August highs is a bit of a concern. This week the pound's under pressure against the Kiwi, heading back towards the 2.24 October low. Downside from there is 50% Fibonacci at 2.2150.
In the short term it looks like GBPNZD could head lower, possibly break down below 2.24 and look for a fresh 5 month low. With the ECB monetary stimulus later this week and the majority of the market expecting no cut from the RBNZ next week it’s conceivable that GBPNZD will test 2.2150 and possibly lower. I think a stop loss order below 2.24 with a topside target of 2.29 initially. Longer term, if GBPNZD can break back above 2.30 then 2.35 would be the target.
Wise to sell a portion of your NZD here and another tranche if it breaks below 2.24 after ECB – if the RBNZ cut rates next Thursday it’ll move against you but if they don’t the Kiwi will strengthen a bit more.