NZD Shorts Face High Bar for Further Losses Amid RBNZ Tightening Expectations

MUFG's Derek Halpenny sees tension between aggressive Reserve Bank of New Zealand (RBNZ) tightening expectations and increasingly stretched short positioning in the New Zealand Dollar (NZD).

While softer labour-market conditions cast doubt on nearly 100bps of tightening priced over the next year, MUFG argues that bearish NZD positioning may already be extreme.

A more attractive Australian yield profile continues to favour AUD/NZD, although potential El Niño-related terms-of-trade support could limit further NZD downside.

The weekly IMM positioning data revealed Leveraged Funds' total short position had hit a record in the series going back to 2006, with the NZD actually being the third-best performing G10 currency on a year-to-date basis.

The RBNZ policy rate currently stands at 2.50%, but the OIS curve implies expectations of nearly 100bps of tightening over the next 12 months, which MUFG believes may be too aggressive compared to the RBA's pricing.