Traders have bet US$1.2 billion that the kiwi dollar will fall against the greenback, adding to the risk of a corrective rebound even though US interest rates are unusually higher than those in New Zealand.
Latest data from the Commodity Futures Trading Commission (CFTC) shows that speculative traders' net positions are short NZD and long US dollars to the extent of US$1.2 billion, at levels reached only a few times since 2010. Going short means betting on a currency to decline. A trader may borrow the currency with the idea they can buy it cheaper down the track, leaving some profit when the money is repaid.
"The indicator can be a useful contrarian indicator," said Jason Wong, senior markets strategist at Bank of New Zealand. "When spec positioning is net short it means a low hurdle rate to see a lift in the NZD, as positive news would tend to result in a closing up of that positioning, resulting in speculators buying NZD."
Current levels of shorting the kiwi have been "fairly rare because in years’ past, shorting a high-yield currency like the NZD could be expensive," Wong said. "With NZ short rates now below US rates, it is now much cheaper to short the NZD. In that sense, we shouldn’t be too surprised that shorting the NZD has become more of a theme over the last couple of years."
The New Zealand dollar fell to its lowest level in two years on Friday at 67.34 US cents. So far this year it has declined 4.7 percent against the US dollar. By contrast, the US dollar index, which measures the greenback against a basket of currencies, has gained 3 percent. Traders who watch charts say there are other reasons to suspect the kiwi could rebound.
Last week the Reserve Bank kept its official cash rate at 1.75 percent and reiterated that it is in no hurry to raise rates, prompting some bank economists to push out their expectation for a full rate hike to March 2020. By contrast, the Federal Reserve's last move was to hike the fed funds target to a range of 1.75 percent to 2 percent and the market is betting there is more to come.
Mark Johnson, a private client manager at OMF, says the US dollar index has "double-topped". Twice in the past three weeks, the index has rallied up to about 95.50, an 11-month high, without managing to break any higher - an indication of a resistance level that may hold again. Meanwhile, the NZ dollar's decline against the greenback last week pushed the relative strength index of the kiwi below 30, which indicates it may be poised to rise.
"If you're trying to assess the potential for further short-term weakness in the kiwi, what would the drivers be," Johnson said. "We've heard from the Reserve Bank. There's not too much data to push things. There might be potential for a corrective rebound as some of those short positions get squeezed," he said.