The past four months of New Zealand Dollar declines leave medium-term momentum to the downside, but predicting price action on a week-to-week basis is far from an exact science. We have for months argued that a sharp correction in global financial risk appetite was likely to force a substantive correction in the similarly overstretched New Zealand Dollar.
Recent CFTC Commitment of Traders data shows that Non-Commercial traders remain fairly heavily net-long the high-yielding NZD. This stands in fairly clear contrast to Forex Options sentiment; risk reversals show that markets are paying considerably more for bets on New Zealand Dollar weakness. Given that FX Options risk reversals tend to lead speculative positioning, fairly bearish sentiment points to further medium-term NZD losses. Yet whether or not the New Zealand dollar falls through shorter-term trade will depend almost entirely in broader financial market risk sentiment. It will be critical to watch whether the S&P 500 and other indices can continue to recover after posting noteworthy losses on a year-to-date basis. - DR
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