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Recent CFTC data for the NZD shows that net positioning has reached extreme short levels and even though the CFTC data is only partial, but when at extremes, it is often thought to provide a contrarian signal for future currency direction, according to analysts at ANZ.

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“NZD has of course remained weak through the past fortnight despite this positioning backdrop, so is this perception of it being a contrarian indicator just a fallacy?”

“The RBNZ has recently looked at the CFTC figures to see if it assists with currency forecasting. The authors conclude that “positioning data can help with interpretation of historical exchange rate changes, although its use as a predictor of exchange rates is limited.” And when looking at the correlation between net positioning and the change in the NZD/USD over the next four weeks, that does seem like a sensible conclusion.”

“However, we still believe there is some information content in the data.”

“If we just look at when positioning is at extremes (i.e. when it has a z-score of +/- 1.5), there does seem to be evidence of this contrarian signal.”

“What is critical to consider when looking at positioning data is the economic context; currency markets don’t operate in a vacuum after all. When we overlay periods when NZD net positioning is at extremes and the economic surprise index, it helps to provide better perspective on possible future NZD movements.”

“There is no denying that positioning is at extremes. However, the fact that economic data has been deteriorating relative to expectations explains why there has not been the contrary reaction from the NZD just yet.”

“If the data flow remains weak, then this theme could persist. However, it is fair to say that we are now at a point where any stabilisation or positive data surprises would likely see an outsized positive NZD reaction.”