Bank's Model Bets 25% of Entire Portfolio Against the New Zealand Dollar

- NZD now worst bet in G10 according to FX model

- Westpac allocates 25% of the G10 portfolio to shorting the currency

- US and Canadian Dollar on the other hand the most positive, says algorithm

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© kasto, Adobe Stock

A leading bank's G10 FX portfolio model has increased the share of the funds it is betting against the New Zealand Dollar (Kiwi) to a maximum of 25% of all funds, in the week starting May 14, according to Richard Farnulovich, an FX analyst at Westpac Bank, the institution which developed the model. 

"Our suite of signals continue to lean heavily against NZD, the model upping its short to 25% of the portfolio, the biggest position for the model," says Franulovich.

The Westpac model evaluates all the G10 currencies against a set of 9 macro-economic criteria and based on the results allocates a certain percentage share of the portfolio betting with or against the currency - in the case of the Kiwi at the moment against.

All but one of the criteria are negative for the Kiwi; these include growth potential, yield potential based on interest rate differentials, short-term valuation, and long-term valuation, which are all pointing to more losses. The only positive for the currency is its "positive external account" which means its current account balance which oscillates between surplus and deficit.

The Kiwi was hit recently after the new governor of the Reserve Bank of New Zealand (RBNZ) Adrian Orr said he foresaw interest rates remaining at 1.75% for "some time to come".

The expectation of subdued interest rates for a long time tends to depreciate a currency as it lessens its attractiveness to outside investors who seek higher-yielding currencies for their investments.

The implication from Orr was that low growth in New Zealand would keep inflation flat, necessitating continued low-interest rates to sustain borrowing and growth.

The largest long-position of the portfolio is the 23% allocated on betting the Canadian Dollar will rise.

The US Dollar also has a large positive 21% allocation in its favour, but factors driving it higher have diminished.

"Two key factors that fueled the USD’s sharp appreciation in the last month - material undervaluation and extreme short positioning - have moderated," says Franulovich.

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