Big Investors are Dumping this Currency – and You Should Too

Joined : 30 Mar 2008 Posts : 42 Location : New York

Greetings Currency Traders!

For years, this darling carry trade currency could do no wrong.

Risk-loving investors borrowed cheap Japanese yen or Swiss francs and literally poured their newly borrowed yen or francs into this high-yielding currency. Then they pocketed the difference.

And as a result, this high-flying currency has enjoyed a massive two year rally. Which currency am I talking about? The New Zealand dollar - aka the "kiwi" in currency circles.

Why has New Zealand been flying high? The country kept raising interest rates. In fact, not too long ago New Zealand's rates reached 8.25%. That's the highest among the industrialized nations.

So if you're in the U.S. earning a paltry 2% return or you're in Japan earning 0.5%, the New Zealand dollar has looked pretty good for a long time.

So of course, fund managers poured money into this currency. And why not? New Zealand is a "commodity economy." Of course you know where commodities have gone these past couple of years. Combine their commodity exports, a very high interest rate, and an uptrend on the charts and things couldn't have been better for the kiwi.

But Things Are About to Change for the Poor Kiwi

Roll the hands of time forward to today and wow - how things are changing. Many major funds recently just turned on the Kiwi like a rabid dog.

In short, these fund managers are starting to take a good look at New Zealand's economy. The high interest rates are starting to hurt this country's housing market. Their numbers have been dipping quite a bit lately (and if you're in the U.S. or U.K., you know what kind of impact that can have).

Then the high exchange rate has started to kill New Zealand's exporters. New Zealand is such an "export heavy" country, so expensive exports can severely damage this little economy. And the economy is so small that factors like this can really hurt much more than in a bigger and more diversified economy.

When things go south in a small economy like this, it can come down about as fast as a penny stock.

Seven Firms Say "See Ya" to the NZ Buck

Seven major firms have wasted no time in bailing out of the Kiwi. In fact, several have mentioned they are actually shorting it. Now you'd really better have a good feeling about it going down when you short a high yielding currency because you're paying out that high interest rather than receiving it. However, if the pair drops far and hard enough, then it was more than worthwhile.

These seven firms (Black Rock, DWS Investments, Citigroup, Lehman Brothers, Fortis Investments, RBC Capital Markets and Morgan Stanley) have "ganged up" on the poor little kiwi.

Now that the New Zealand fundamentals are turning south (housing, retail sales, the services sector, etc.) the risk of holding this high yielder just went up exponentially and these firms know it.

When you have the fundamental erosion with this many firms selling their New Zealand dollars and also selling short the New Zealand dollar, it doesn't take much to push this small economy around.

In fact, I'm sure the central bank is glad that these firms are selling their dollar (and even shorting it). Why? It was only months ago that their central bank UNSUCCESSFULLY intervened in the currency market by selling their currency and buying U.S. dollars.

However, as unsuccessful as it was, it did reveal the "wishes" of the central bank. They want the currency exchange rate to go down so that it doesn't kill the exports they depend on.

The New Zealand Central Bank should send these firms a gift because they're doing what the central bank was powerless to do.

(Just a side note: Rarely is one central bank successful over the long term at turning their currency around. History shows us a very bad track record there. However, when many central banks "gang up together", then they can be successful...and that's exactly what it appears these firms have done.)

Black Rock alone controls over US$1.4 trillion. Imagine when you combine all of these big names together. Granted all of their money isn't going towards selling the NZD/USD pair, but a good chunk of it is.

New Zealand unemployment fell the most since 1989 and their home sales just slumped to a 16-year low, these firms know the currency is about to tank.

Just How Bad Could Things Get?

So how bad do some of these guys think the fall may be? Well, Lehman Brothers thinks the pair could fall a whopping 17% by year-end. That's huge. And really, it would be huge if it were half of that.

Black Rock thinks it will plummet from its highs above 82.00 down to 73.50. They're one of the firms that is short the pair by the way.

Fortis thinks this pair is going to 70.00 in six months and they're also short the NZD/USD.

Lehman thinks this pair is going to 64 cents by year-end.
So these guys are thinking that the U.S. dollar is really going to rally hard against this small country and very soon. They've got a lot riding on it.

These Hedge Fund Managers Know
What They're Talking About

I believe these guys are on the right track too. The NZD/JPY pair could fare much better than the NZD/USD - I think NZD/USD is about to take a fall.

It won't take long at all for this little economy to be hit hard. It's just like a small capitalization stock getting hit much harder than a larger capitalized company.

And I think this global slow down that we're experiencing is going to hit this little economy very hard, especially with these ultra-high interest rates in place and the highest exchange rate since 1982.

In fact, the beginning of the end may have already started. Just this morning, Bloomberg reported that the Bank of New Zealand Ltd - the third largest bank in New Zealand - has said the New Zealand dollar will fall to its lowest in six months against the British pound.

So expect the downtrend to hold and for the U.S. dollar to finally "get one up" on another major currency.

The NZD/JPY will likely still hold up a bit better than NZD/USD. However, I'd rather see someone in AUD/JPY than NZD/JPY due to the heaving commodity buying going on from China with the Aussies.

But in the short-term, the New Zealand dollar should be avoided for the most part. It's got far more downside potential than upside potential and I think you'll find that the downside action will be quite severe over time.

Joined : 30 Mar 2008 Posts : 42 Location : New York

Oil hit another new "all-time" high today. Oil blew through the next psychological barrier of US$130 a barrel to settle at US$132 a barrel this morning.

According to Bloomberg, oil prices took yet another trip north because oil stockpiles dropped in the United States. Meanwhile demand is growing still, and the supplies simply aren't getting any larger.

What We Say:

So how does this affect currencies? Honestly, not a whole lot.

The reason the news was curiously quiet about the big commodity currencies like the Aussie, Canadian dollar ("loonie"), and the Brazilian real was because none of these currencies seemed to notice the run-up in oil prices.

It's very possible that the sky-high oil prices have already been priced into all these currencies. The market players around the world have already taken the higher oil into account and have largely discounted it.

So even if commodities continue to soar, it's very possible that the commodity currencies will remain strong