NZD: Vulnerable positioning - Nomura

The latest positioning data show leveraged funds' net long NZD positions, as a proportion of total contracts, are at multi-year highs, points out Peter Dragicevich, Research Analyst at Nomura.

Key Quotes

“At the same time, short-dated NZD/USD risk-reversals, while still negative, are above their long-run average, illustrating reduced demand for put options. The bullish skew in NZD market positioning suggests the currency is increasingly vulnerable to an asymmetric adjustment. A catalyst for this could be the RBNZ once again leaning against the market’s relatively more exuberant interest rate expectations. This could be amplified if the RBNZ chooses to intensify the rhetoric against the NZD. NZD underperformance in the weeks of RBNZ MPS meetings (November 2016, February 2017 and May 2017) has been the norm over recent quarters, given the Bank’s repeated push-back on market perceptions.” 

“We still think a large degree of optimism is priced into the NZD near current levels. We prefer to express a tactical negative NZD bias via an unequally weighted basket against currencies where: (a) the macroeconomic and monetary policy impulses are stronger and more fundamentally entrenched, such as CAD (20%) and EUR (30%); (b) positioning and sentiment appear extended, such as USD (30%); and (c) in pairs that are historically interest rate sensitive and would benefit from a relative re-pricing in RBNZ expectations given the upbeat views of its own central bank, such as AUD (20%).”

“We are targeting NZD/CAD (currently 0.9350) to decline to 0.9170, NZD/USD (currently 0.7380) to decline to 0.7200, and for EUR/NZD (currently 1.5970) and AUD/NZD (currently 1.0730) to rise to 1.6350 and 1.0910 respectively. We would hold stops in NZD/CAD, NZD/USD, EUR/NZD and AUD/NZD at 0.9470, 1.0575, 1.5750 and 0.7500 respectively.”