Pound Remains Bullish On Strong IHS Mfg. PMI Data

Pound Remains Bullish On Strong IHS Mfg. PMI Data

Last week, the New Zealand Dollar traded on the defensive against the currencies of developed countries, following the inking of new Policy Targets Agreement between Finance Minister Grant Robertson and incoming RBNZ governor Adrian Orr. The agreement requires the central bank policy to encourage maximum levels of sustainable employment along with stable inflation at or near target levels. The inclusion of employment target in the central bank’s mandate turned the kiwi dollar weak. However, the Pound was unable to gain ground against the Kiwi dollar. The holiday shortened-week and month-end conversions (pound to euro) by Bundesbank (German central bank) for contribution to the European budget kept the pound under pressure. However, in the week ahead, we expect the pound to rally against the Kiwi dollar due to the facts presented underneath.

In New Zealand, for the fourth consecutive time, global dairy prices fell at an auction conducted Tuesday. The decline was mainly due to expectation of a turnaround after supply decreased due to unusually dry weather late last year. Fonterra Co-operative Group Ltd, the largest dairy society in New Zealand, reported a 2% decline in the output volume in February, compared with a 5% decline in the previous month. The Global Dairy Trade Price Index dropped 0.6%.  The average dairy selling price was $3,477 per ton. During the previous auction, the index fell 1.2%. New Zealand exports almost 95% of its dairy produce. Therefore, a decline in global dairy prices will have a negative impact on the kiwi dollar.

Commodity currencies such as AUD, CAD, and NZD have certain unique characteristics, which turn them weak when market volatility increases and borrowing costs go up due to rising interest rates. Presently, the interest rates in the US are higher than in Australia for the first time in a decade, and equal to those in New Zealand. Therefore, investors do not have any advantage in parking their funds in those countries. This is also turning the kiwi dollar weak.

The latest IHS Markit manufacturing survey revealed that the UK industries performed well despite the cold weather. The Manufacturing PMI rose to 55.1 in March, from 55 in the earlier month. Analysts were expecting the PMI to decline to 54.80 due to heavy snow.

Another important point to note is that Pound generally remains strong in April due to large inward remittances by multinational companies. For the past 14 years, the pound has gained against the dollar and other currencies in April. According to Kamal Sharma, a currency strategist at Bank of America Merrill Lynch, the trend will continue in 2018 as well. The argument is based on the fact that the market is optimistic about an amicable Brexit deal soon. Furthermore, Britain’s economy has performed better than expected over the last 18 months. The average hourly earnings remain strong and there is a growing expectation that the public sector wage cap will be removed in the coming months. The market is also expecting a monetary policy tightening in 2018. The facts discussed above favour a short-term rally in the GBPNZD pair.

Technically, the GBPNZD pair is moving along an ascending channel as shown in the image below. Furthermore, the currency cross has a strong support at 1.9190. Therefore, we are expecting the GBPNZD pair to move up further.

GBPNZD - Technical Analysis - 5th April 2018

To benefit from the current rally, we may establish a long position in the GBPNZD pair near 1.9260. As a disciplined trader, we would certainly place a stop loss order below 1.9140. Simultaneously, we would also place a sell order near 1.9480 to book profits.

We may also buy a call option, which is valid for a period of seven trading days. An option contract offered by a binary broker may be considered only if the currency pair trades near 1.9260 in the Forex market.  

Disclaimer: The trading analysis offered here is our opinion. It is not provided as trading advice, merely an indication of our trading plan. We cannot guarantee success and we encourage traders to incorporate a strong money management strategy to limit losses. Please use this article as part of your own research before formulating strategies prior to trading.

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