The New Zealand dollar is being driven lower as speculators make near record bets that new US policies will hurt trading economies.
On Friday morning the kiwi briefly fell below US68.5c, the lowest level in 11-months, and a drop of close to US2c in a week.
The fall is not only against the US dollar, with a sharp drop against the euro, the British pound and the Australian dollar in recent days.
On the trade weighted index (TWI), a measurement of a basket of currencies in proportions which reflect New Zealand’s major trading partners, the NZ dollar is at the lowest level since July 2016.
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A weaker dollar makes imported goods – especially items like petrol – more expensive for consumers, but can boost the economy by making New Zealand’s exports cheaper overseas.
Tourists coming to New Zealand will find their money goes further, while Kiwis heading offshore will face higher prices in New Zealand dollar terms.
While the New Zealand dollar is one of the most traded currencies in the world, global factors which push the currency around – generally termed risk appetite – would currently tend to push it higher.
Zoe Wallis, chief economist at Kiwibank, said indexes which measured volatility across financial markets were at the lowest level in years, share markets were high and bond markets suggested investors were seeking risk.
“When you look at risk indicators at the moment, everything’s looking quite positive,” Wallis said.
Nevertheless data provided by currency speculators suggested there was either a record – or near record – bets that the kiwi will fall against the US dollar.
Wallis said this was likely to reflect the increasingly protectionist rhetoric of the United States.
The sharp fall on Friday came as US president Donald Trump promised an investigation into aluminium imports. That followed moves to impose tariffs on timber and dairy imports.
Imre Speizer, senior market strategist with Westpac, said while Trump had long promised policies which would protect the US economy, as Trump announced specific moves, markets pushed currencies with large commodity exports, such as New Zealand, Australia and Canada, lower.
“Anyone who exports to the US, or exports the kind of stuff that the US uses, will be affected, and so they’re clobbering those currencies, and the kiwi’s getting clobbered pretty hard,” Speizer said.
Speizer said it was possible the New Zealand dollar could be pushed lower, to around US67c cents, but it was unlikely to drop sharply from here, in part due to the volume of bets already against it.
Because the market is so heavily skewed against the New Zealand dollar, at some point when the traders look to exit their bets, this would tend to push the dollar higher.
One trader said it was possible that the betting could turn suddenly, if there was unexpectedly strong economy data in New Zealand, or if the US Federal Reserve indicated that it would raise interest rates more slowly than markets anticipated.
This could see a rush of traders looking to exit their position, causing the dollar to spike, in what is typically called a “short squeeze”.
“It’s like a ball you hold under water, then let go,” CMC Markets sales trader Sheldon Slabbert said.
“As soon as the pressure lifts, that’s when you could see the kiwi lift one and a half cents in a day type of thing.”