The New Zealand Dollar struggled in mid-week trade after commodity prices fell and New Zealand employment data showed a flat-lining in jobs creation.

The Pound to New Zealand Dollar exchange rate (GBP/NZD) recorded a daily high of 1.7844 but negative sentiment towards the New Zealand currency was broad-based in nature with our relative performance statistics showing it to be the worst-performer of on the day:

Undermining the currency was a slip in global commodity prices that weighed on the commodity-currency sector in general - the AUD, CAD and ZAR are examples of other currencies in this family that were seen underperforming global peers.

The CRB Commodity Index showed a 0.7% decline on the back of declining oil prices, but more relevant to the Kiwi was the 1.6% decline in Whole Dry Milk on Tuesday at a world auction organised by the Global Dairy Trade Exchange.

Dairy products are New Zealand’s greatest exports and of these Dry Whole Milk the largest, so a fall in the base cost of Dairy products lowers the demand for New Zealand Dollars from overseas buyers.

The currency was further hit by data showing NZ employment fell by 0.2% in Q2 when it had been forecast to rise by 0.7% from 1.2% previously.

This is the first contraction in employment since the third quarter of 2015 while the participation rate of employees in economic activity slide 0.6%. Meanwhile, despite New Zealand boasting an overall healthy employment dynamic, wages remain subdued.

This is a theme familiar to a number of developed economies - despite unemployment levels being at historically low levels, wages aren't picking up.

Currency markets are betting these dynamics will keep the Reserve Bank of New Zealand on hold when it comes to interest rates for some time yet.

However we would caution that the data is not dreadful and the NZD is unlikely to take a terminal hit on the figures. We would need to watch future reports for signs that there is in fact a problem.

"The market (NZD) has taken the figures negatively. We think that is an overreaction. With workers increasingly difficult to find, labour demand will naturally slow. And eventually this will manifest in stronger wage growth," says Cameron Bagrie, Chief Economist with ANZ Bank in Auckland.

Where Next for GBP/NZD?

It is currently trading at 1.7823, and although the volatile gap up shows a lot of bullish strength – as does the trend-line break – there is also a strong possibility the exchange rate will fall back down and fill the gap.

This is especially probable given the context of the gap, which is within a sideways consolidation range, or box pattern, as we noted in our previous analysis.

Gaps which occur within ranges are more likely to close than those which happen when the exchange rate breaks out of ranges.

The analysis is, however, further complicated by the fact that the gap marked a break above a major trend-line, and could therefore be initiating a change of trend.

The three white soldiers candlestick pattern at the lows also supports a bullish conjecture.

Whilst there is a possibility of a pull-back in what analysts call a ‘throwback’ the up-trend would be expected to extend higher eventually, and a break above the 1.7850 highs is expected to lead to a continuation up to the next target at 1.7975.

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