I'm looking to maintaining a short position on the NZD/CAD currency pair. Recent developments suggest continued downside for the NZD relative to the CAD.

NZD Weakness: The New Zealand dollar has experienced a decline over the past week following the Reserve Bank of New Zealand’s (RBNZ) recent policy update. The RBNZ's dovish stance, highlighted by a rate cut and indications of potential further reductions throughout the year, has put downward pressure on the NZD. This shift towards lower yields in New Zealand is likely to continue affecting the NZD negatively.

CAD Outlook: Conversely, the Canadian dollar appears poised for relative strength. The market has largely priced in additional rate cuts by the Bank of Canada (BoC), with expectations set for three 25bps reductions over the coming months. The upcoming Canadian Consumer Price Index (CPI) report is anticipated to show continued easing of inflation pressures, reinforcing the case for a rate cut in the near future.

Market Sentiment and Positioning: Market sentiment towards the CAD is currently bearish, but positioning data reveals extreme levels of short CAD positions by Leveraged Funds, which could signal a potential rebound in the near term.

Geopolitical Considerations: While not the primary focus, it's worth noting that any geopolitical events, such as a potential conflict involving Iran and Israel, could drive up oil prices and introduce additional geopolitical risk premiums. This scenario might temporarily benefit the CAD, although our main rationale remains the relative monetary policy outlooks.

Conclusion: Continuing the short position on NZD/CAD given the ongoing dovish stance of the RBNZ and the more balanced outlook for the BoC. Adjustments in the New Zealand interest rate environment and positioning extremes in the CAD suggest that the current trade remains favorable.

Short NZD/CAD

Aug 18 2024

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