Pound / New Zealand Dollar: Big Move Imminent as Market Compresses

© Comugnero Silvana, Adobe Stock

The Pound-New Zealand Dollar currency pair appears to be consolidating and establishing the foundations for a big break, but which way will the exchange rate move?

The GBP/NZD exchange rate looks to be a market that is flatlining with the currency pair looking increasingly reluctant to move away from the big 1.90 level.

The daily range in the exchange rate appears to be narrowing with neither bulls nor bears taking control with  evidence of the apparently stagnating market being encapsulated clearly in the below chart:

But we would caution that the compression evident in the above could ultimately lead to a break out either higher or lower as such states don't tend to persist.

Think of the situation as a coiling spring, and what is needed now is a trigger to generate the directional move. Our suspicions suggest this trigger will come from the Sterling side of the equation.

With this in mind, watch the looming European Council Summit due to be held on March 22-23 where leaders will agree on whether to enter into a transitional Brexit period with the UK.

Failure to do so would almost certainly trigger a break in GBP/NZD lower. A 'yes', would however probably have the effect of sending Sterling higher.

"Both the prospect and the timing of a transitional deal on Brexit remain highly uncertain. If such a deal does take place, however, it could be an important positive development for sterling in the near-term by reducing 'cliff-edge' risks," says Lefteris Farmakis, a strategist with UBS.  

Signals this week concerning ongoing Brexit negotiations suggest that the two sides are closing in on a deal and that there should be some good news for Sterling bulls to latch onto next week.

However, gains would be short-term in nature Farmakis argues saying that there will of course remain uncertainties following the agreement of a transitional Brexit Deal.

"This is because they relate to the new trading arrangements between the EU and the UK after Brexit against a still- vulnerable current account position and a fundamentally expensive currency. Thus we retain our structurally bearish view on Sterling over the long haul," says Farmakis.

On the New Zealand side of the equation, confidence has been returning now that the new Labour-lead government has found its stride and convinced markets that there are no significant market-unfriendly policy changes in the pipeline.

Strong global commodity prices, robust domestic economic growth are seen to be behind the NZD's recent outperformance.

However, there are concerns that the currency is starting to punch above its weight when global developments are considered.

"The New Zealand dollar has surprised many with its resilience over recent months. Its strength has been in the face of the disappearance of interest rate differentials versus the US, higher volatility on global markets, and the recent threats of global trade wars," says Sharon Zollner, Chief Economist with ANZ Bank.

Concerning the outlook, ANZ are not convinced the NZD's period of outperformance will persist, "particularly as global liquidity continues to tighten, which should eventually put the NZD back on the defensive." You can read more on ANZ's views here.

On margin, this reads GBP/NZD positive to us, but again, when it comes to this exchange rate it is the Brexit transition deal resolution that will be the key determinant in delivering fresh levels.

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