Why There’s High Interest in the New Zealand Dollar

 

During the early part of 2013 New Zealand suffered a severe drought, and due to its large agricultural sector this affected economic growth. The declining economic conditions led to the visible drop in large open interest holders (LOIH) in New Zealand Dollar (NZD) futures, visible on the graph.

 

 

After the drought, the NZD rallied over the last year due to strong domestic growth.  Inflation accelerated during the end of 2013 and the first quarter of 2014, half of which was due to house price rises and household utilities rises. This coupled with rising business confidence and GDP growth led the Reserve Bank of New Zealand (RBNZ ) to begin a rate tightening cycle . In March the RBNZ raised rates by 25 basis points to 2.75 percent and continued with three more consecutive hikes of 25 basis points leaving rates at 3.50 percent on July 24.

This strategy has begun to work and the RBNZ Governor now says the bank will suspend the rate hikes given the “unjustified and unsustainable” level of the NZD and moderate inflation. This led to extreme volatility in the NZD/USD currency pair over this period. In turn this has attracted interest in NZD/USD futures , leading to the record number of LOIH. Total open Interest  – the number of current open positions for a futures or options product – was 28,311 for NZD/USD at the end of July and in August rose to 24,049. While not quite records, open interest has more than doubled over the last year.

Some market participants will likely be investing in NZD bonds, as they have a low chance of default and reasonably high returns.  Currency weakness can reduce bond profits , and foreign exchange futures can also be used to hedge against this risk, therefore, high levels of interest in NZD futures may be a trend we’ll continue to see in the coming months.

Sean Hayden is Director of FX Products at CME Group.

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