Since January 2018, the New Zealand dollar has lost about 15 percent against the US dollar. In turn, from January 2019 till today, the loss was about 9 percent. As a result, NZD was one of the weakest currencies, and sentiment on this market became very bearish.
New Zealand's economy is heavily dependent on exports and the economic situation in Australia and China. The ongoing trade war had a significant impact on those countries where the economic downturn deteriorated, growth prospects declined, and central banks had to cut already record low interest rates. This consequently did not favor the Australian dollar (AUD) or the New Zealand dollar (NZD). Nevertheless, the falling exchange rate helped to import inflation, and also offset the deterioration in exports.
Meanwhile, investors on the New Zealand dollar futures market significantly increased their focus on further NZD depreciation at the beginning of October. This can be seen by the number of net long positions, i.e. the difference in long and short positions among investors speculative to the market, i.e. non-commercial investors. According to CFTC data, there has been no such bearish sentiment on this market for at least a decade as it is now.
NZD non-commercial net long positions. Source: tradingster.com
Looking at this chart, it can also be said that the vast majority of investors who were already trading to depreciate the New Zealand dollar have already done so and the market seems to be quite oversold. Hence, the rise of chances of a potential so-called short squeeze, or very rapid closing of short positions, which in turn can lead to an increase in NZD value.
The NZD / USD exchange rate is still vulnerable to information about trade war. As reported today, there may be progress in trade talks between Washington and Beijing this week. A step towards alleviating the conflict could help NZD. From this point of view, it is one of the most interesting currencies at the moment.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal Opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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