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team Graham Parlane

NZD/GBP - are we justified up here?

Posted by Graham Parlane on 13 March 2013

Hi

The NZD/GBP has been trading around multi –decadal highs of late. With the drought and the spectre of what I think will potentially be a more dovish than expected RBNZ tomorrow is the NZD really justified up here?

I’m a trend trader at heart and I don’t really like to pick tops but…

The market is chatting about the 8.1% annualised rise in NZ house prices (data released yesterday) and how upset the RBNZ will be about that. But the central bank is clearly working to the introduction of ‘macro prudential tools’ as they call it, to restrain house prices without using the ‘blunt’ instrument which is the official cash rate. You see, the RBNZ hate hitting housing with a rise in the cash rate because that usually comes with a higher currency which hurts the tradeable sector. They’re forever between the rock and the hard place so to speak.

The moderate knowledge I have about these new tools can quickly be summed up here in the NBR articlehttp://www.nbr.co.nz/article/downside-risk-use-macro-prudential-tools-warns-rbnz-bd-136767

Simply put, the introduction of these tools will to some degree limit the need for rate hikes surely?

This impending change and the drought make me very wary of NZD strength at the moment. On the other side of the equation the U.K economy has its own problems for sure but the fact that GBP/USD has fallen 16 big figures in 10 weeks suggest to me the NZD/USD could easily play catch up resulting in a lower cross. Indeed, currently I think the GBP/USD is actually due a bounce from last night’s price action.

Looking at the chart of the NZD/GBP cross yesterday was the beautifully, and emotively named ‘hanging man’……..you don’t need to think too hard about whether that’s a good sign or a bad sign huh? Downside follow through is beginning immediately after in today’s trade. I have high expectations for a move lower as a result

NZDGBP – click here to view chart

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