New Zealand Dollar Down as Carry Traders and Speculators Smell Blood

Our latest analysis concerning the outlook for the NZ dollar confirms yet further losses could lie ahead for the currency against the dollar, euro and pound sterling.

The NZ dollar has come under sustained selling pressure as we move into the mid-month session of May with indications that the currency’s period of outperformance against global peers has come to an end, the scale of the decline and the darker outlook has prompted speculative traders to position themselves for further declines.

The NZD is seen in reverse gear against the dollar, pound sterling, euro and the vast majority of major currencies with speculation rife that the Reserve Bank of New Zealand (RBNZ) is ready to cut rates not once but twice in 2015.

“With the highest yield in the industrialised world the New Zealand dollar remains the darling of the carry trade crowd, but its allure will quickly disappear if the notoriously hawkish RBNZ decides to ease its grip on the country's monetary policy,” says Boris Schlossberg at BK Asset Management.

The carry trade refers to the borrowing of money in low interest rate jurisdictions (Yen, Euro, Pound) and transferring them to higher interest rate yielding jurisdictions (Australian, New Zealand dollars). In doing so the beneficiary location sees a rise in exchange rates.

This has long been the central driver of NZD performance and should this advantage be eroded the currency will in all liklihood struggle.

The declines in NZD have certainly caught the imagination of the markets, as communicated by Steven Knight, Research Analyst for Blackwell Global:

“I think we have all been there at some time in our lives. That feeling of euphoria, having a wave at the beach lift you off your feet towards the heavens, only to discover that what goes up must come down, and the feeling of abject terror as you realise you are now hurtling towards the bottom, without a lifeguard in sight. That’s the conundrum that Kiwi FX traders feel looking at their charts today.”

That feeling of euphoria was certainly present at the start of 2015, we have this year published a number of reports covering analysis from some of the world's leading investment banks which all pointed to 2015 being a strong year. The declines remind us just how quickly, and brutally, fortunes can swing in global currency markets.

The Sell-Off Could be Just Beginning

A run of below-par economic data releases and disappointing dairy auction prices has convinced markets that the RBNZ will act and could cut interest rates as soon as the June policy meeting. A further cut could well follow soon after to reinforce the new-found policy.

“If that scenario develops as expected, the selloff in the kiwi is just beginning and the pair could drift to test its lows at 0.7200 over the course of the next few weeks,” says Schlossberg giving his forecast for the NZD vs US dollar exchange rate.

The NZ dollar could succumb to a fresh wave of selling pressure in the short-term should Chinese Industrial Production disappoint. “Expect to see the pair decline to support at 0.7340 this week as Short sellers ride the wave lower,” suggests Blackwell's Knight.

There are positives though - New Zealand exporters will benefit from the depreciating Kiwi Dollar as their goods become more competitive on the global stage owing to a more favourable foreign exchange rate. The RBNZ will certainly be smiling at the turn in fortunes for the currency as they have long been advocating for a weaker rate.

“So maybe it’s time I grabbed my surf board to ride a few waves of New Zealand’s finest waters, and to forget about the crashing wave that is the Kiwi dollar,” says Knight, sticking with his maritime analogy.

Looking to Profit on the Decline

The deterioration in the Kiwi's outlook will inevitably attract speculators looking to make money by betting against the currency. This is in an important observation as such positioning could well exacerbate the move lower should enough money be brought into play.

Trader Kathy Lien at BK Asset Management says selling the New Zealand dollar is one of her top trades at the present time:

"We believe that the weakness in data and change in monetary policy outlook is very bearish for the currency and the main catalyst for further losses will be the central bank's Financial Stability Report and Wheeler's press conference Tuesday afternoon / Wednesday morning local time. If Wheeler talks easing NZD/USD could drop below 72 cents.  The New Zealand dollar is a currency that you should be trading this week and after today's sharp decline, the best tactic would be to sell on a bounce."

At the time of writing we are seeing such a bounce and would imagine that if there are enough traders in the market thinking that bounces will be temporary the NZD could well struggle to extend too far.