Roger J Kerr says the 'risk/reward equation' suggests profit-taking from speculators will send the New Zealand dollar lower over coming weeks and months

By Roger J Kerr

Whilst the Kiwi dollar has remained at the top end of its trading range against the US dollar – above 0.7300 – its overall performance in the forex markets has been one of hesitancy with the currency not making gains against a weaker USD as other major currencies have in the past week.

It seems that the FX speculative fraternity are somewhat reluctant to buy the Kiwi aggressively at these levels, which are at the top end of its 12 month trading range.

The market’s hesitancy about pushing the NZD/USD rate higher could also be associated with the two risks coming up that we highlighted last week: The US trade/import tariff report, which is now due, and the NZ General Election on September 23.

The spectacular five cent ramp up in the NZ dollar from lows of 0.6820 in mid-May to above 0.7300 today was mostly due to speculators reversing positions from being short-sold NZ dollars to going “long” on the Kiwi.

The chart below confirms the reversal in position-taking through the month of June as outstanding NZD/USD futures contracts on the Chicago Exchange dramatically changed from 15,000 net short NZD positions to 20,000 net long NZD positions today.

The long position holders are now sitting on profitable trades as the Kiwi soared up to 0.7300.

History tells us when the long NZD futures contracts move above 20,000 in number the Kiwi dollar becomes extremely vulnerable to a sell-off as profit-taking by those position holders requires the Kiwi to be sold.

The NZD/USD exchange rate reversed engines from highs in 2011, 2012, 2013 and 2014 when the open futures contracts were over 20,000 long NZD.

We are back there again and the risk/reward equation suggests profit-taking from the speculators will once again send the Kiwi dollar lower over coming weeks/months.

As always, it will require a catalyst to prompt the punters to sell the Kiwi.

That catalyst may well be the Trump trade/import tariff report that is due out any day now.

We observed a two cent sell-off in the NZD/USD rate in late April when President Trump tweeted that imported dairy products could be added to the Canadian lumber import tariffs.

A very similar scenario is brewing again right now and thus local USD importers should be hedged to high levels over the next six months and exporters holding off or using FX options as the method of hedging.

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Roger J Kerr contracts to PwC in the treasury advisory area. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com