Point to Establish Short Exposure: Breakdown below 68.15 cents per NZD
Spot: 69.15 cents per NZD
Target:66.40 cents per NZD (200% Fib Extension)
Invalidation Level: 69.50 cents per NZD (Nov. 28 high)
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The NZD/USD jumped over 1% after news surfaced that a new Reserve Bank of New Zealand chief had been named. The surge was attributed to a large number of short positions that were surprised by the appointment of the New Zealand Sovereign Wealth Fund, Adrian Orr and previous deputy governor of the RBNZ to act as chief going forward.
Hedge Funds Cover Near-Record Short on New Chief
Late last week, the CFTC’s Commitment of Traders (CoT) report showed one of the largest short-positions on record for NZD/USD so the pop higher was likely due to profit taking due to a known dovish Central Bank getting a new governor that could shake things up. Since the election where a new Prime Minister, Jacinda Ardern, took over, NZD has been the worst performing developed market currency in 2H 2017.
Data source: Bloomberg. Chart created by Tyler Yell, CMT
Technical Outlook Favors Downside Continuation Below 69.50/80
While traders should be aware of a potential short-term squeeze carrying the flightless bird (the namesake Kiwi), a resumption below 68.15 US cents per NZD could be the technical signal that NZD/USD is resuming its downward trend. Short term resistance is expected at 68.50, and the downside target is 66.40, which is a 200% Fibonacci Extension of the initial move lower from July to August.
A break and close above the zone of resistance highlighted on the chart between 69.50/80 would indicate the downside preference was premature and traders should anticipate a broader short-covering rally. Absent a break higher, a continuation of the downtrend is preferred.
NZD/USD Chart with resistance at 0.6981/50 outlined:
Chart created by Tyler Yell, CMT
NZ Sentiment Shows Short Positions Rise as Price Jumps
Retail trader data shows 58.3% of traders are net-long with the ratio of traders long to short at 1.4 to 1. In fact, traders have remained net-long since Oct 18 when NZDUSD traded near 0.70693; the price has moved 2.2% lower since then. The percentage of traders net-long is now its lowest since Nov 19 when NZDUSD traded near 0.67989. The number of traders net-long is 11.0% lower than yesterday and 12.8% lower from last week, while the number of traders net-short is 45.5% higher than yesterday and 27.7% higher from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests NZDUSD prices may continue to fall. Yet traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current NZDUSD price trend may soon reverse higher despite the fact traders remain net-long.
Written by Tyler Yell, CMT