New Zealand Dollar: Extreme shorts face a high bar for further losses – MUFG
MUFG’s Derek Halpenny sees a tension between aggressive Reserve Bank of New Zealand (RBNZ) tightening expectations and increasingly stretched short positioning in the New Zealand Dollar (NZD).
New Zealand's central bank, the Reserve Bank of New Zealand (RBNZ), is tightening monetary policy expectations by nearly 100 basis points over the next year, according to MUFG's Derek Halpenny. However, the bank warns that short positions in the New Zealand Dollar (NZD) may already be excessively stretched. The latest weekly IMM positioning data shows that leveraged funds have reached a record high short position in the NZD, dating back to 2006.
Despite a strong year-to-date performance for the NZD, the OIS curve suggests expectations of nearly 100bps of tightening by the RBNZ. The recent increase in the unemployment rate, from 5.4% to 5.6%, indicates increased labor supply and greater economic slack than previously assumed. The bank believes that the scale of short NZD positioning is more extreme than the 100bps of tightening priced and that a significant leg lower for the NZD would be challenging at this level.
Additionally, the potential El Niño-related terms-of-trade support could provide a positive bias for the NZD.
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