GBPNZD Quarterly Report

The path of GBPNZD will be most impacted by the outcome (finally!) of the UK-EU Brexit negotiations, the deadline looms ever closer and it’s still unclear whether or not the UK will agree a trade agreement with the EU or it will trade under WTO rules. The direct effect on the rate will be quite stark if there’s a deal expect to see GBPNZD rally approx. 5% and conversely no deal likely to see GBPNZD weaken 5-8% which based on the current market gives an upper move to 2.05 and a lower drop to 1.85-1.80 level.

Yesterday Goldman Sachs put a note out to their clients saying on balance they see a trade deal being agreed early November and as such to expect the see the pound slowly increase in value in the run up. Other investment banks have differing opinions, Nomura suggesting there’s still a good chance of no deal. So trading conditions are going to be volatile and it’s a great time to use automated orders to catch spikes in the rate.

So that’s the main event risk but also importantly domestically in NZ the Reserve Bank of New Zealand are also looking closely at the overvalued NZD. It hampers the affordability of their exports and makes them less competitive and they have been talking about further interest rate cuts to the overnight cash rate (OCR) – further monetary easing would weaken the NZD.

Also, importantly, the US has an election in November, the outcome of which will push stock markets and risk appetite higher / lower and trade relations with China could also improve (in the case of a Democrat win) or deteriorate further (if Trump wins a second term) which will affect Chinese economic demand and consequently, in turn, it’s demand for soft and hard commodities from Australia and New Zealand.

So myriad factors will influence GBPNZD over the next quarter, how then does GBPNZD look on a purely technical basis?

After a strong rally up to April 2020 high at 2.1050 the pound came across heavy selling pressure and since July prices have found strong support at 1.90-1.9050 region.

That looks like solid support so I don’t envisage prices going below that level UNLESS there’s a no-deal Brexit, that will open up significant sell off as mentioned earlier down to 1.80-1.85 region.

The initial upside target from the current 1.95 level is the 50% retracement from the April high to July low which comes in at 2.0270 and so if the noises coming out of UK/EU sources becomes more positive expect prices to move towards that level.

For buyers

Depending on your timeframe and risk appetite the sensible strategy would be the hedge your bets/split your risk and convert a portion of your GBP assets this month before any deal/no-deal announcement. Then average up with the remainder of your assets once the dust has settled.

Sellers

With GBPNZD recently bottoming out at 1.9050 the current rate is still good for sellers particularly if in a few weeks the UK / EU reach a deal so I would recommend converting to thirds of your NZD here with an order to convert the rest on a break below 1.90