New Zealand Dollar at Risk of Declines as S&P 500 Turns Lower

New Zealand Dollar at Risk of Declines as S&P 500 Turns Lower

Fundamental Forecast for New Zealand Dollar: Bearish

• New Zealand Retail sales surprise sharply to topside, point to strong consumption
• New Zealand Dollar lags as risk sentiment takes a hit

The New Zealand Dollar fell sharply against its resurgent US namesake amidst a sharp correction in financial market risk sentiment, and the threat of a positioning unwind leaves the NZDUSD at risk of further short-term pullbacks. We recently wrote that overextended speculative NZD long positions left the pair in danger of losses, and the most recent turn lower in FX Options risk reversals suggests that such a move may very well be underway. A relatively empty week of economic event risk means that the NZD will likely trade off of broader financial market moves, and it will be critical to monitor the trajectory of the US S&P 500 and other key risk barometers.

According to recent CFTC Commitment of Traders data, speculative New Zealand Dollar long positions recently hit their highest levels since the pair topped in May. If we see a sharp return to risk aversion across financial markets, such one-sided bets could easily unwind and cause a fairly dramatic decline in the New Zealand currency. Of course it is difficult to anticipate and much less profit from such sharp moves. Thus we will need to watch for any and all signs of a sell-off in ‘risk’—perhaps taking high-risk/high-reward positions in anticipation of any such moves.

It is obviously difficult to determine whether the past week of S&P 500 tumbles will be the start of a larger move lower. This author was caught on the wrong side of the trade when in mid-June the index showed similar signs of setting an important top. It serves to note that the June high has not been broken, and there is no clear S&P 500 support until we near the 1000 mark. Needless to say, the next moves in this key risk barometer will be critical in determining the trajectory of the risk-sensitive New Zealand Dollar. -DR