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Hedge funds hold out hope for kiwi dollar

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Despite the torrent of bad news, hedge funds have refrained from adding short positions. One reason may be their view of this week's RBNZ meeting.

Singapore

POSITIVE signs may be emerging for the world's worst-performing major currency.

The out-of-favour kiwi dollar has tumbled about 3 per cent this quarter as the Reserve Bank of New Zealand turned dovish and cut interest rates, the first central bank in the developed world to do so. Economic growth held at a five-year low in the three months through March, leaving the door open for further easing.

Despite the torrent of bad news, hedge funds have refrained from adding short positions. They held minimal bearish bets of 1,408 contracts as at the week ended June 11, little changed since the end of last year. That compares with net shorts of as much as 27,938 in 2018, according to Commodity Futures Trading Commission data.

One reason they are reluctant to go bearish may be their view of this week's RBNZ meeting. Further kiwi downside could be limited even if policy makers stay dovish as the market is already pricing in 42 basis points of additional rate cuts this year, based on swaps.

On the flip side, a moderately hawkish tone on Wednesday may bolster the currency. The kiwi jumped as much as 1.7 per cent on the day of the RBNZ's February meeting when the central bank played down talk of an imminent rate cut. Any suggestion that policy makers would like to wait for further information before easing again may see a repeat of that rally.

There were even some positives in last week's GDP data for those who cared to look closely. Quarterly growth was quicker than the 0.4 per cent projected by the RBNZ in its May statement, led by a jump in construction, the statistics agency said.

Technical indicators also offer some positives. The currency bounced off its May 23 low of 64.82 US cents last week, one of a number of support levels between 64 and 65 cents poised to limit further declines.

So far, the emerging positives have only convinced hedge funds to sit on the fence. It may not take many more before they start to build some long positions. BLOOMBERG