BNY’s Bob Savage highlights that the New Zealand Dollar enters the upcoming RBNZ meeting on a weak footing, with a notable lack of recent flows and a large NZD outflow linked to unrolled swap positions. He notes that doubts over the RBNZ rate path and relatively weak NZD carry versus history could see long positions trimmed if growth risks persist.

NZD pressured by flows and carry

"NZD heads into tomorrow’s RBNZ decision on a very soft footing. To make matters worse, there were barely any flows last week; Friday’s outflow was then exceptional at close to -2.5 scored flow. This was the biggest outflow since April 2018, due to a large net long position (in swap) which was not rolled over."

"While it did not produce a clear FX impact, the size of the flow is significant and points to a large net exposure reduction. If such positions purely follow developments in rate differentials, it should not come as a surprise if the market is continuing to harbor doubts over the current trajectory of rates."

"Although three more are in the price for the rest of the year, increasing hesitation on the RBNZ’s part could lead to gradual reductions in any existing long positions, especially if underlying assets are not expected to perform well given the current risks to growth."

"Given the overall flow trends since early March, NZD has broadly held on despite global risk aversion, but two attempts to put together a good purchase run in late April and mid-May have both faltered."

"If the U.S. now starts to shift gears on rates, it will be hard to see high-beta G10 names perform well, especially as NZD’s carry is far weaker than historical norms."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)