New Zealand Dollar Short Squeeze Looms as Extreme Shorts Rebalance

The New Zealand Dollar (NZD) has accumulated an extreme short position, but according to MUFG's client note, its downside may be limited. The bank argues that further depreciation faces a high bar because much of the negative news is already priced in.

MUFG points out that speculative traders have taken on bearish bets due to a relatively dovish Reserve Bank of New Zealand (RBNZ) outlook, soft domestic economic data, and persistent strength in the US Dollar. The note highlights that NZD shorts are among the highest in the G10 space.

However, MUFG cautions that one-sided positioning often sets the stage for a reversal, especially if any positive surprise emerges. The bank notes that the RBNZ has already signaled a pause in its easing cycle, which could provide some support to the currency.