Hedge Funds Raise Bets Kiwi Will Fall as RBNZ Decision Looms

(Bloomberg) -- Hedge funds are resuming bearish bets on the kiwi as the Reserve Bank of New Zealand's Aug. 12 policy decision draws near. Key economic data this week will determine if they are on the right track.

Leveraged funds' net short positions in the New Zealand dollar jumped to 6,492 contracts in week through July 28, bringing a recent run of declines to an end, according to Commodity Futures Trading Commission data.

The move comes as the currency's more than 20% surge from its March low has it nudging overbought territory on technical charts. But caution is warranted after investors were burned twice this year by the central bank.

The kiwi rallied sharply on Feb. 12 after funds were wrong-footed when the RBNZ signaled it was unlikely to cut interest rates this year. A month later traders were scrambling to keep up with a rout in the currency after it slashed its benchmark interest rate by 75 basis points.

The nation's second-quarter jobs reading this week will be of great significance to currency investors, as will two-year inflation expectations, given the central bank's dual mandate for managing prices and employment.

Inflation expectations were 1.24% in the second quarter, hovering near the lower boundary of the RBNZ's 1%-3% medium-term target range. Should the third-quarter reading remain at a similar level, expectations will rise for a boost in quantitative easing this month, adding to downward pressure on the kiwi.

At the same time, the unemployment rate for the second quarter is forecast to jump to 5.5%, from 4.2% in the prior three months.

Technical indicators also suggest further upside in the currency may be limited near-term, with resistance at its Dec. 31 high of 0.6756 versus the greenback approaching. The slow stochastics gauge, which provides a clue to momentum, is nearing oversold territory.

The kiwi's continued rise on a trade weighted basis since RBNZ's June meeting also raises the prospect of policy makers trying to jawbone the currency lower. At their last gathering they noted the negative impact of its appreciation on export earnings.

To be sure, whether investors resume stick with bearish bets or turn bullish won't entirely ride on what happens in New Zealand.

The nation's deteriorating relations with China and coronavirus flare-ups in all parts of the world will keep them on edge for some time to come.

Below are the key Asian economic data and events due this week:

• Monday, Aug. 3: China Caixin manufacturing PMI, Australia job advertisements, Japan manufacturing PMI and 1Q GDP, Indonesia CPI
• Tuesday, Aug. 4: RBA rate decision, Australia trade balance and retail sales, Tokyo CPI, South Korea CPI
• Wednesday, Aug. 5: New Zealand 2Q employment, China Caixin services PMI, Japan services PMI, Philippine trade balance and CPI, Singapore retail sales, Indonesia 2Q GDP, Thailand CPI and Bank of Thailand rate decision
• Thursday, Aug. 6: New Zealand 2-year inflation expectations, South Korea BoP current account balance, Philippine 2Q GDP, RBI rate decision
• Friday, Aug. 7: RBA statement on monetary policy, Australia home loans, Japan labor cash earnings and household spending, China trade balance and foreign reserves, Malaysia industrial production

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