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NZDUSD Outlook: RBNZ May Spark Larger Short Squeeze

NZDUSD Outlook: RBNZ May Spark Larger Short Squeeze

Justin McQueen, Strategist

NZD Analysis and Talking Points

  • NZD Looks to RBNZ’s Final MPS of the Year
  • Mixed Data Calls for Neutral Stance
  • NZD Shorts Vulnerable to Further Short Squeeze
  • O/n expiries suggest break-even of 52pips

See our quarterly NZD forecast to learn what will drive prices through mid-year!

The Reserve Bank of New Zealand will publish its final monetary policy statement of the year at 2000GMT where the central bank is expected to maintain the OCR rate at 1.75%. OIS (Overnight Index Swaps) have more or less fully priced in an unchanged rate decision. Consequently, focus will be on the monetary policy statement and whether the Governor Orr may provide a more balanced approach, relative to his dovish tilt in the August MPS.

Source: Refinitiv (RBNZ Interest Rate Expectations)

Mixed Data Calls for Neutral Stance

Since the last RBNZ rate decision (Sep 27th), economic data has been broadly mixed, although the central bank will likely take pleasure in the fact that inflation for Q3 moved closer to the mid-point of their 1-3% range, while the latest jobs data had also surprised to the upside. Although, with a closer inspection of the recent data, headline inflation jumped on the back of a falling exchange rate and rising fuel prices, while the central bank’s preferred inflation model (Sectoral Sector) remained at 1.7%. Alongside this, the latest jobs report highlighted that wage growth remains subdued. However, an acknowledgment by the RBNZ of improving could provide a lift for the NZD as markets reign in bets of a rate cut.

New Zealand Economic DataDateLatestExpectedVerdict
Manufacturing PMI (Sep)Oct 11th51.752 (Prev.)Bearish
CPI (Q3)Oct 15th1.9%1.7%Bullish
CPI Sectoral Sector (Q3)Oct 15th1.7%1.7% (Prev.)Neutral
Trade Balance (Sep)Oct 24th-1.56b-1.47b (Prev.)Bearish
Fonterra Milk PricesNov 6th-2%-0.3%Bearish
Jobs Growth (Q3)Nov 6th1.1%0.5%Bullish
Unemployment Rate (Q3)Nov 6th3.9%4.5%Bullish

Source: DailyFX (New Zealand Economic Data Since RBNZ’s September Meeting) *Please send feedback on table if helpful

Trading the RBNZ

Given that market pricing is fully priced in for an unchanged rate decision, the focus will be on the monetary policy report. In light of recent encouraging data, the RBNZ may adopt a more positive outlook and a less dovish rhetoric relative to comments made in August. It is unlikely that the RBNZ will alter its rate guidance (“the next move in the OCR could be up or down). Although, they may rethink their OCR forecast by bringing forecast expectations of a rate rise (current seeing a rise by September 2020). As such, with NZD short positioning hovering around the highs of the year at 2.296bln, the currency is vulnerable from a further short squeeze.

Option Pricing suggests that we could see some modest volatility over the event with vols indicating a break-even of 52pips.

NZDUSD Price Chart: Daily Time-Frame (July 2017-November-2018)

Chart by IG

Following the breakout from the descending trendline, NZDUSD has continued to saw. However, resistance on the upside at 0.6830 (200DMA) and 0.6850 (38.2% Fibonacci Retracement) may see gains in the pair begin to top out, particularly given the size of the gains in the short time period.

NZDUSD Technical Strategy

IG CLIENT POSITIONING AHEAD OF RBNZ

Data shows 60.6% of traders are net-long with the ratio of traders long to short at 1.54 to 1. In fact, traders have remained net-long since Sep 20 when NZDUSD traded near 0.65776; price has moved 3.1% higher since then. The number of traders net-long is 8.3% lower than yesterday and 17.1% lower from last week, while the number of traders net-short is 9.0% lower than yesterday and 11.4% lower 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. Positioning is more net-long than yesterday but less net-long from last week. The combination of current sentiment and recent changes gives us a further mixed NZDUSD trading bias.

NZD Analyst Picks

--- Written by Justin McQueen, Market Analyst

To contact Justin, email him at Justin.mcqueen@ig.com

Follow Justin on Twitter @JMcQueenFX

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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