The sharp rally in the NZD/USD pair has done little to shake bearish conviction. Speculators have yet to unwind their net short positions in the kiwi, choosing instead to accept the pain rather than incur losses. That resilience could prove costly for hedge funds. Let’s analyze the situation and develop a trading plan.
The article covers the following subjects:
Major Takeaways
- The RBNZ has begun a monetary tightening cycle.
- Hedge funds are still selling the kiwi.
- The divergence is benefiting the New Zealand dollar.
- The AUD/NZD pair can be sold with a target of 1.17.
Weekly New Zealand Dollar Fundamental Forecast
While many market participants are still weighing their next move, the Reserve Bank of New Zealand is already taking decisive action. At its July meeting, the RBNZ not only raised the official cash rate from 2.25% to 2.5% but also signaled that this was only the beginning of its tightening cycle. Combined with stronger-than-expected PMI data, the central bank’s hawkish rhetoric propelled NZD/USD to its highest level since early June.
The RBNZ’s clear commitment to further monetary tightening caught speculators off guard. While asset managers have modestly trimmed their net short positions in the New Zealand dollar, hedge funds have continued to add to their bearish bets despite the sustained rally in NZD/USD quotes.
Speculative Positions on New Zealand Dollar
Source: Bloomberg.
Major players are clinging to their short positions tooth and nail, offering a growing list of arguments to justify their stance. Bears contend that New Zealand’s economy remains heavily exposed to higher oil prices, meaning any renewed escalation of the conflict in the Middle East would deal a severe blow. They also point out that the RBNZ’s 2.5% policy rate still trails the RBA’s 4.35% by a wide margin. In their view, the interest rate differential is too large for the AUD/NZD to show a sustainable decline.
AUD/NZD Price and Interest Rate Differential
Source: Bloomberg.
In reality, Brent’s return above $90 per barrel is a double-edged sword for New Zealand. While a surge in oil prices could weigh on GDP growth in a net oil-importing economy, it could also push inflation well above the Reserve Bank’s current forecasts. According to RBNZ Chief Economist Paul Conway, such a scenario would prompt the central bank to respond with further policy action.
The futures market is currently pricing in three additional rounds of monetary tightening from the RBNZ—two in 2026 and another in the first quarter of 2027. By contrast, derivatives markets are factoring in only one rate hike from the RBA, while speculation is growing that the RBA’s tightening cycle may already be nearing its end. Furthermore, markets expect the Australian central bank to begin easing policy next year.
This divergence provides strong support for AUD/NZD bears. However, speculators caught on the wrong side of the trade insist that the key technical level of 1.20 will limit the pair’s decline. I would not rely on that assumption. While the RBA–RBNZ rate differential remains substantial, the Forex market only places significant weight on such a gap when the central bank with the higher rates is moving too slowly. For example, Japan offers a useful comparison: markets currently expect the Bank of Japan to tighten policy at a much more gradual pace, roughly one move every six months.
The RBNZ, by contrast, appears prepared to act more decisively. That faster pace of tightening should support further New Zealand dollar strength against its peers. While gaining ground against the US dollar may be challenging, the outlook for the kiwi against the loonie looks considerably more favorable.
Weekly NZDUSD and AUDNZD Trading Plan
Against this backdrop, the NZD/USD pair may move swiftly toward a bearish target of 0.582. If the Fed continues to delay further rate hikes, the pair could advance to 0.60 and 0.61. As for the AUD/NZD pair, the downside target should be revised lower from 1.19 to 1.17, with any pullbacks viewed as potential opportunities to add to short positions.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of NZDUSD in real time mode
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