The New Zealand dollar advanced as traders who had bet on the currency’s decline took profits ahead of the Reserve Bank interest rate decision tomorrow.
The kiwi rose to 66.32 US cents at 8am in Wellington, from 65.89 cents at 5pm yesterday. The trade-weighted index gained to 70.37 from 70.21 yesterday.
The Reserve Bank is expected to cut the official cash rate by 25 basis points tomorrow, with some saying there is an outside chance of a 50 basis point cut. Strong immigration data yesterday may have prompted some traders to pull back their bets on a 50 basis points cut. Those betting the currency would decline may have taken profits. Speculative investors are holding the biggest net short position in the New Zealand dollar on the Chicago Mercantile Exchange since the series began in 2003. A short position is a bet a currency will fall in value.
“It looks like it’s a bit of a short squeeze ahead of the OCR announcement tomorrow,” said Peter Cavanaugh, client advisor at Bancorp Treasury Services. “Speculators are exceedingly short New Zealand dollars so this is a chance to take a bit of profit.
“We have also seen a bit of US dollar weakness overnight so the world had probably gone too far on the currency front and with the substantial positioning against the New Zealand dollar, the rebound is exacerbated.”
Bancorp’s Cavanaugh expects the Reserve Bank will reduce the benchmark by 25 basis points at tomorrow’s review.
“It would seem more sensible and more central bank-like to do 25 now and lay the foundation and give guidance for a series of further 25 point cuts until the cash rate is at an appropriate stimulatory level,” he said.
The focus today will be Australian second-quarter inflation and a speech by Reserve Bank of Australia governor Glenn Stevens in Sydney.
The New Zealand dollar slipped to 89.34 Australian cents from 89.60 cents yesterday, fell to 60.64 euro cents from 60.91 cents, gained to 42.65 British pence from 42.34 pence, and advanced to 82.18 yen from 81.99 yen.