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Sterling should extend its advance against the New Zealand dollar this week, with the Kiwi short of friends.
The Pound to New Zealand Dollar exchange rate has broken above the July peak that capped it through the summer and now trades at its highest since 2015, and with that obstacle cleared the uptrend has room to run.
Momentum is stretched after a run of this length, with the relative strength index up at 75 and into the territory that usually calls for a pause, so a first pullback should surprise nobody.
From a technical perspective, the monthly chart shows how far back you have to go to find the market trading where it is now:
Above: GBP/NZD monthly chart. Image © Pound Sterling Live, chart created with TradingView.
The Pound last changed hands at these levels against the Kiwi in 2015, and the break leaves nothing overhead until the peak of that year, which our reading of the monthly chart puts near 2.4150. That is a long way up, and it means the market is now trading without the usual signposts.
GBP/NZD trades at 2.3645 at the start of the new week, having taken out graphical horizontal resistance at 2.3536 set by the July peak, and it reached 2.3650 in Monday morning trade.
That level now becomes the first support beneath the market, and a broken resistance that holds on its first retest is the cleanest confirmation a breakout gets.
The 100-day moving average has risen since late August and sits at 2.3088, better than two percent below the market, which confirms the trend is intact and says nothing useful about where a pullback would stop.
The reading at 75 on the relative strength index is the one argument against chasing the move here. An overbought market is not a capped one, but it has done a great deal of work in a short time, and trends that run this hot tend to pause before they go again.
Our base case is for the advance to extend, with pullbacks towards 2.3536 bought while that level holds. A daily close back beneath it would say the break was a false one and put our Pound to New Zealand Dollar forecast back inside the summer range.
Our call a week ago was for the pair to hold its rising 21-day average and push back to the July peak, with a daily close above it marking the breakout. That is what happened.
A Kiwi Problem, Not an Antipodean One
The Kiwi is falling while the Australian dollar holds its ground, which is unusual for two currencies that normally travel together, and it marks this out as a New Zealand story rather than a regional one.
“The sharp hawkish repricing of the RBNZ following the start of its tightening cycle has failed to lift the NZD,” say strategists at Barclays in a weekly strategy note. “This is already cause for concern, given market pricing for a return to outright restrictive policy across all benchmarks, despite a starting point of a substantially negative output gap, a generally challenging backdrop for small open economies and a dovish hike by the RBNZ in September.”
“New Zealand does not share Australia’s terms-of-trade boost and is even more exposed to a potential diesel export ban by the US,” the bank adds, “therefore, we pencil in further underperformance versus the AUD in our new forecasts.”
A currency that will not rally on a central bank turning hawkish has a problem somewhere else, and the market has spent the past fortnight locating it.
Daniella Arcadipane, Senior Currency Specialist at Indigo
Moving a life-changing sum abroad? You won’t be doing it alone.
One specialist explains every step in plain English and stays with it until the money lands. FCA authorised, FRN 594433.
Rising Volatility Puts the Carry Trade at Risk
What does rising volatility do to a currency like the Kiwi? Investors borrow where interest rates are low and hold the proceeds where they are high, and New Zealand has long been a favoured destination for that trade. The position earns its return while exchange rates stay calm, but once they start to move the risk outweighs the interest and the trade is closed, which means selling the Kiwi.
Volatility is picking up. The Euro has been sliding against the Dollar on French and Spanish debt concerns, and a move of that order in the largest currency pair lifts the price of risk across the market.
Speculators were short the Kiwi to the tune of 17,315 contracts in the week to 29 September, having added 5,935 to the position, according to CFTC figures compiled by RaboResearch. That is a modest position next to the shorts held against the Pound and the Australian dollar, which leaves room for it to grow.
New Zealand’s week runs to the GlobalDairyTrade auction and the NZIER quarterly survey of business opinion, second-tier releases that will not reset a trend on their own. The rule applies all the same: a reading above expectations says the economy can carry higher interest rates, which supports the Kiwi and pulls GBP/NZD lower, and a miss does the reverse. The next Reserve Bank of New Zealand decision falls on 28 October, the same day as the UK Budget.
Sterling’s own week carries the final reading of September’s services PMI on Monday at 09:30, where the flash estimate was 51.7, the construction PMI on Tuesday at 09:30 after a previous reading of 44.3, and Bank of England Chief Economist Huw Pill speaking in London on Thursday at 11:30. None of it looks likely to interrupt a market that has just cleared eleven years of chart, which keeps our Pound to New Zealand Dollar forecast pointed higher.
Daniella Arcadipane, Senior Currency Specialist at Indigo
Moving a life-changing sum abroad? You won’t be doing it alone.
One specialist explains every step in plain English and stays with it until the money lands. FCA authorised, FRN 594433.
