Hedge funds have increased bearish bets on the New Zealand dollar to the highest level in almost two decades, even as the currency has strengthened following a more hawkish stance from the Reserve Bank of New Zealand (RBNZ), according to a report by Bloomberg.
Latest Commodity Futures Trading Commission (CFTC) data shows leveraged funds expanded their net short positions by 1,907 contracts to 29,582 in the week ended 14 July, marking the largest net short position on record in data stretching back to 2006.
Asset managers also maintained a negative view on the currency, although they reduced their bearish exposure slightly from previous levels. Their positioning nevertheless remained close to the weakest sentiment towards the kiwi since December.
The positioning reflects growing concerns among macro-focused hedge funds that higher oil prices could weigh on New Zealand’s economy. Recent tensions in the Middle East have pushed crude prices back above $90 per barrel, raising fears that the country’s reliance on imported energy could pressure its trade balance and dampen domestic growth.
New Zealand narrowly avoided slipping into a trade deficit last month, while consumer spending has shown signs of weakening, adding to concerns over the economic outlook.
Andrew Ticehurst, senior rates strategist at Nomura, said New Zealand’s economy appeared to have stalled during the second quarter and described higher oil prices as an additional macroeconomic headwind. As the country is heavily dependent on imported oil, rising energy costs represent a negative terms-of-trade shock that could weigh further on the currency, he said.
Ticehurst also noted that the scale of hedge fund short positions was somewhat unexpected, as many market participants had anticipated investors would unwind bearish trades after the RBNZ confirmed it had entered a tightening cycle earlier this month.
Despite the surge in short positioning, the New Zealand dollar has rallied since the central bank’s 8 July policy meeting. The kiwi traded around $58.5 cents on Monday, up roughly 3% over the period and outperforming all other G10 currencies, highlighting the divergence between recent price action and hedge fund positioning.
