The New Zealand dollar finally shows some strength, by pushing higher against most of its major counterparts. Brexit continues to be one of the main political issues that surrounds us today, as the talks and the disagreements continue.
The EU and the UK negotiators met in an unscheduled meeting on Sunday to discuss the Irish boarder issue. There is less than six months left until the official “divorce” date and there is still no clear guidance on how the two sides will proceed with the Irish border. Mrs May said that the EU wants to keep Northern Ireland in the EU customs union if the UK plan is not achieved in time when the transitional arrangement ends in 2020. This is because the EU is afraid that if Britain leaves the bloc without an agreement, this could disrupt trade between them and the EU, which could have negative effects that are too difficult to predict. Mrs May has told that Northern Ireland could not be treated differently, as it is part of the UK and such measures could divide the country.
Prime Minister Theresa May has told on Monday that she hopes that the Irish border issue will not halt further Brexit negotiations, as she believes that a deal could be achieved in the upcoming weeks. European leaders are trying to find any assurance that their domestic market will be protected, and additional checks could be implemented on the future boarder, but without going back to the physical infrastructure of checks.
Nevertheless, the pound managed to show some gains against most of its counterparts, apart from losing the battle to the New Zealand dollar. The British pound traders will be heavily watching the developments around Brexit this week, as any news or comment could impact GBP against other currencies.
The Asian trading session today started off with good QoQ and YoY inflation numbers from New Zealand, which came out better than expected. Both were two tenths of a percent higher than their forecasts, where the QoQ was at +0.9% and the YoY was at +1.9%. This gave a boost to the New Zealand dollar against a basket of major currencies. We believe that the NZD could continue strengthening at least for a few more trading sessions this week.
New Zealand was followed by the release of the Royal Bank of Australia meeting minutes. The RBA is sending out warning signals that there could be further tightening of the lending conditions in the country. But at the same time, the Reserve Bank notes that the current policy that is in place, is supporting the economy’s future growth. It allows the employment to strengthen and inflation to remain within the bank’s set target range between 2-3 %.
The Chinese CPIs, together with its Producer Price Index, were also on the watch during the Asian morning. Both, MoM and YoY inflation numbers came out as expected at +0.7% and +2.5% respectively. The only disappointment was the PPI figure, which ticked down by one tenth of a percent, from +3.7% to +3.6%. That said, the Chinese yuan could still be affected more by the geopolitical tensions rather than by data with small changes, or no changes at all.
As for today’s upcoming releases, during the European day, we get the UK employment data for August. Expectations are for the unemployment rate to have remained unchanged at its 43-year low of 4.0%, while average weekly earnings, both including and excluding bonuses, are anticipated to have risen at the same YoY rates as in July, +2.6% and +2.9% respectively.
According to the IHS Markit/REC Report on Jobs for the month, starting salaries for permanent placements rose at the second-sharpest pace in over three years. Temporary payment also increased strongly, but the rate of inflation was softer than the previous month. In our view, the strong increases in both permanent and temporary pay suggest that the risks surrounding earnings may be tilted to the upside, perhaps for a slight acceleration.
GBP/CAD had broken its short-term upside support line taken from the low of the 4th of October but has now started moving sideways. Given that there is still uncertainty around Brexit and the Canadian dollar continues to show more strength, we could see GBP/CAD sliding further down to test the levels where it was in the beginning of the month.
Even though we are still somewhat bearish over the short term, we will wait for a confirmation break below the 1.7025 zone, which yesterday acted as a good support for GBP/CAD. If such a move happens, this is where we could see more bears jumping in and driving the pair lower towards the next potential area of support at 1.6925, marked by the low of the 9th of October. If that area is not able to withstand the pressure from the bears, a further decline could be seen, where GBP/CAD could travel towards the 1.6810 hurdle for a quick test.
It looks like the RSI has topped near 85 zone and moved lower from there. The indicator now sits below 50. The MACD is near zero and remains below the trigger line. Both indicators are showing somewhat negative signs and could eventually confirm the forthcoming drop in GBP/CAD.
Alternatively, if the pair decides to shift back up above the 1.7175 obstacle, which was the inside swing low of the 11th of October, we could then put the downside idea on hold, as some bulls could start getting cold feet. For a better confirmation of the upside, we would need to see a break above the 1.7270 barrier, marked by the high of the 11th of October. This way, we could start targeting the 1.7315 level, or even the 1.7410 hurdle, which held the rate down on the 17th of July.
As we mentioned already above in our analysis, the New Zealand dollar had a boost from the country’s CPI numbers and now looks quite positive. From the technical side, NZD/USD could travel a bit more to the upside, as it is still above its short-term upside support line drawn from the low of the 9th of October. That said, the potential uprise could be limited, as the pair could eventually hit the medium-term downside resistance line taken from the peak of the 25th of June.
For now, we could see a small correction to the downside, but just so that the other bulls, who missed the recent move higher, could go in and drive this pair back up again. A break above the 0.6595 could be seen as a good entry for even more bulls, which could lift NZD/USD towards the next potential area of resistance at 0.6630, marked by the high of the 28th of September. This is where the pair could also meet strong resistance from the aforementioned medium-term downside line that could stall the rate for a while. If NZD/USD reaches that area, we will have to re-evaluate the outlook again, as the buying momentum could slow down, and the pair could struggle again to overcome the downside resistance line, which continued to hold the rate lower since the end of June.
The short-term alternative scenario here could be, if the previously mentioned short-term upside support line gets broken and the pair moves below the 0.6350 hurdle, then we could start examining a possible move to the 0.6500 barrier, marked near the low of the 15th of October. If that barrier doesn’t hold, we could eventually start looking at further declines towards the 0.6455 level, marked near the low of the 10th of October.
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