GBPNZD Trade Idea April 2020

Start this week off with some analysis of the UK we have some interesting numbers on our Currency Strength Meter scores. The GBP has recently gone from a positive strong score to a negative score of -21 giving us an indication that the UK domestic economy is weakening. On the flip side we see some strength in the NZD, this can be due to a few factors like New Zealand being a major exporter for soft commodities like milk and meats which are still in high demand during pandemics.

The GDP differentials have shown an interesting indication over the past 20 odd years. We can see that since the 2000s the GDP differentials were below 0% meaning they’re negative and since then GBPNZD has been on a significant downturn with NZD outpacing the GBP. It is still in the negative region at -1.3% and predicted to stay below 0 meaning we can see the downward trend continue for a couple years using the indication alone.

I mentioned earlier that New Zealand is a huge exporter of dairy products and meats, so we included again one of the major companies within the NZD index, A2 Milk Company.

The a2 Milk Company Limited (a2MC) is engaged in the commercialization of a2MC branded milk and related products as supported by the ownership of intellectual property that enables the identification of cattle for the production of A1 protein-free milk products. The Company operates through four segments, which include Australia and New Zealand; China and other Asia; the UK, and the USA. The Company's portfolio composition includes liquid milk, infant formula and other. The Australia and New Zealand segment includes the sale of milk, cream, infant formula, whole milk powder and ice cream. China and other Asia segment includes milk, infant formula, and whole milk powder sales. The China and other Asia segment is also responsible for the infant formula supply chain from New Zealand to all markets. The UK and USA segment includes milk and infant formula sales. The Company's brands include a2 Milk and a2 Platinum.

Looking at the distribution of returns for A2 milk we can see that on average their returns are 5.35%. The most recent data has shown a growth of only 1.11% and with an inverse relationship to the GBPNZD exchange rate we’ve scored it at a weak -1 score as there’s no significant volatility in the asset right now.

The UK is a major exporter of certain manufactured equipment and this includes the likes of Rolls Royce. As one of UK’s major exporters of heavy metal goods we’ve included it in the analysis as it can affect the GBP significantly.

Rolls-Royce Holdings PLC is a United Kingdom-based engineering company. The Company is focused on power and propulsion systems. Its segments include Civil Aerospace, which is engaged in the development, manufacture, marketing and sales of commercial aero engines and aftermarket services; Defence Aerospace, which is engaged in the development, manufacture, marketing and sales of military aero engines and aftermarket services, and caters to sectors, including combat aircraft, trainer aircraft and helicopters; Power Systems, which is engaged in the development, manufacture, marketing and sales of reciprocating engines and power systems. Power Systems provides power solutions and complete life-cycle support under product and solution brand MTU systems.

Generally speaking, we can see that on average the mean growth of the company is a modest 0.19% month on month. However, the most recent data has shown a huge jump of 20% from yesterday. Since it has an inverse relationship to GBPNZD we’ve scored it at -3 as we see a bounce back in RR gains.

For the interest rate differentials, we’ve taken the last 5 interest rate decisions of both the GBP and NZD and worked out the difference. What we can see is that the Bank of England has reduced the interest rate to near zero for GBP. Similar to NZD however NZD sits at 0.25% which means investors can potentially yield more returns on government bonds if they invest in New Zealand. This slightly negative interest rate differential is being scored at -0.15% since the global economy is causing monetary authorities to act and everyone is reducing interest rates to help stimulate their economies.

Finally, we have the FTSE100 priced in NZD. As we can see from the chart the FTSE has fallen off a climb and dropped over 30% sine the start of COVID-19. This means in general people in the UK have become poorer as the FTSE is linked to many of the people’s pensions and investment strategies. This has caused us to give it a negative score of -3, not too low as we have seen the BoE act and apply QE which has started and the next round applying in May.

We've now got a finalised score of -39 weakness for GBP and +45 strength for NZD. Now that fundamentally we've gathered our thoughts and hypothesis we're going to have a look at the price and then sentiment to time our idea.

Regarding the COT data from the two currencies we can see that GBP is still net long and NZD is hovering the zero mark but still net short. To make sure we time our position correctly, what I would personally be looking out for is for GBP to continue decreasing into net short and NZD flipping to a net long position. This gives us the highest possible confidence whilst still being able to get in on a large portion of the movement.

We can see from the price alone that it is in a potential reversal area which had been respected at the end of 2018. If we do see hedge funds agree with the fundamentals it could be a very promising long term down trend coming forwards. However, if the market continues to rally and we don’t see the COT positions flip we’ll keep a close on eye on it for our watch list.

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