The New Zealand Dollar managed to cap Sterling's advance thanks to a combination of global conditions that tend to favour the currency, a broad-based softening in Sterling and some helpful domestic economic news.
Notably, the price of Dairy Products has risen helping the value of New Zealand’s primary export.
At the global dairy trade auction (GDT) on Tuesday, May 16 the index of a basket of dairy products rose 3.2% whilst the price of Whole Dried Milk, New Zealand’s largest export, increased by 1.3% to $3,312 individually.
The GBP/NZD exchange rate is now quoted at 1.8813, off recent lows seen below 1.86.
Concerning the outlook, the exchange rate remains in a tight consolidation which looks very much like a triangle pattern.
The pattern looks quite evolved now and so may be close to breaking out.
Given the trend prior to the pattern was up there is a slight bias to a continuation higher.
The pair has been rising ever since the formation of the double bottom pattern at the lows, which looks like a ‘W’.
It has now roughly achieved the minimum bullish target generated by the formation and activation of the double bottom at around 1.9000, and so there is an increasing risk of pullback from here up.
However, despite this, there is no definitive evidence the very strong short-term bullish trend is reversing.
Indeed, triangle patterns are often the penultimate moves within trends, suggesting a final spike or surge higher could follow its completion.
We, therefore, see a continuation higher as the most probable next stage conditional on a break above the 1.8963 spike highs.
Such a move would probably reach a target at 1.9100.
>> Retail FX Market Update: Best international payment rate on GBP vs NZD now seen at 1.8812 as bank accounts seen offering in region of 1.8154-1.8285. More on this here.
As far as major data releases still to come, Retails Sales is out on Thursday, May 18 at 9.30 (BST), and will probably be the most significant release in the week ahead as it covers the UK economy’s current weak spot.
Consumer spending has slowed in the first quarter as the weak pound has pushed up shop prices for imports, which has caused a slowdown in spending.
Given consumer spending accounts for the largest proportion of GDP, this not a positive sign for the economy.
Slower growth will lessen even further the likelihood of the Bank of England (BOE) bringing forward the time when they will raise interest rates.
And given relatively higher interest rates tend to attract more capital flows which increase the value of a currency the pound stands to lose out if the BOE adopt a more dovish tone – which by dovish means more inclined to cut rather than raise interest rates.
There are no major economic releases still to come for the New Zealand Dollar and we would expect the currency to take cues from global conditions.
We note that in the mid-week session conditions have turned less favourable to the currency.
"Risk aversion is tightening its grip on markets amid a sense that a deepening crisis may be descending on the White House following yesterday’s revelations suggesting that President Trump urged former FBI director Comey to drop an investigation into former NSA director Flynn. It is no stretch to say that speculation regarding the future of the presidency is rising. Investors are shunning stocks and favouring safe havens on the day so far," says Shaun Osborne, an analyst with Scotiabank.
Should this latest saga concerning Trump blow over and traders regain confidence, we could see NZD put in further resistance to Sterling's advance.