MUFG’s Derek Halpenny highlights a significant development in the New Zealand Dollar (NZD) market, noting that leveraged funds' total short positions in NZD have reached a record high according to weekly IMM positioning data for the week ending 11th August, with the data series dating back to 2006 [1]. Despite this extreme bearish positioning, NZD remains the third best performing G10 currency year-to-date, following NOK and AUD [1].
The Reserve Bank of New Zealand (RBNZ) policy rate is currently at 2.50%, while the OIS curve suggests market expectations of nearly 100 basis points of tightening over the next 12 months [1]. However, MUFG expresses skepticism about the RBNZ's ability to deliver this level of tightening, citing recent labor market data showing the unemployment rate rising from 5.4% to 5.6% despite strong employment growth, indicating increased labor supply and greater economic slack [1].
The analysis also points out that the attractiveness of Australian yields continues to favor the AUD/NZD cross, with the Reserve Bank of Australia (RBA) maintaining a relatively hawkish stance and energy and Middle East risks benefiting AUD more than NZD [1]. Nevertheless, MUFG argues that the current scale of short NZD positioning is so extreme that further significant downside for NZD would require a high bar to be met [1]. Additionally, potential El Niño-related upside risks to food inflation over the next six months could provide NZD with a positive terms of trade lift [1].
MUFG concludes that while market pricing for RBNZ tightening may be too aggressive, the extreme short positioning in NZD suggests limited scope for further notable declines unless new negative catalysts emerge [1].
CONCLUSION
Record short positioning in the New Zealand Dollar suggests that further significant declines may be limited unless new negative developments arise. While market expectations for RBNZ tightening appear excessive, potential positive terms of trade shocks and stretched bearish sentiment could support NZD in the near term.