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Dollar Bulls Find Next Big Short as Election Risk Whipsaws Kiwi

  • New Zealand dollar set to fall to 70 cents, AMP Capital says
  • Currency slips as latest poll shows Labour maintaining lead

Dollar bulls looking for a good short are betting against the kiwi as the New Zealand election race tightens.

Singapore-based hedge fund manager Keith Dack switched to a bearish wager on New Zealand’s currency against the greenback after profiting from its drop to a more than one-year low versus Australia’s dollar last week. AMP Capital Investors Ltd.’s Nader Naeimi, meanwhile, expects the kiwi to weaken by about 3 percent to 70 U.S. cents by year-end.

What initially seemed like an easy win for the incumbent National Party turned into a veritable vote contest after Aug. 1, when Jacinda Ardern, 37, became leader of the main opposition Labour Party. The kiwi has fallen 3.3 percent since then, and options traders are the most bearish on the currency among developed markets, one-month risk reversals show. Fueling the decline is a mini-rebound in the greenback amid renewed hopes for tax reform.

“The U.S. dollar has bottomed in the short term,” said Dack, a manager at Kit Trading Fund Ltd. “And the New Zealand dollar looks like a good candidate to short given the election uncertainty.”

Opinion polls have become market-moving events for the kiwi, with a survey Thursday showing Labour maintaining its lead over the National Party ahead of the Sept. 23 vote sending the currency down as much as 0.3 percent within seconds. 

In its bid to secure a rare fourth consecutive term, National has promised tax relief and a focus on strong economic management. Ardern’s party is pledging to ban property sales to non-resident foreigners, look at a capital-gains tax and change the governance structure of New Zealand’s central bank.

“The general trend across the various polls continues to point to a close-run race,” said Peter Dragicevich, a currency strategist at Nomura Singapore Ltd. “This uncertainty should continue to be a New Zealand dollar headwind.”

Volatility Spike

While there is potential for a protracted period of uncertainty for the kiwi during any coalition negotiations after the election, a “status quo outcome” could also spark a relief rally, he said. No major party has won an outright majority since New Zealand introduced proportional representation in 1996.

Two-week implied volatility for the kiwi against the greenback climbed above 13 percent on Thursday, its highest point since the U.S. election in November. The currency was little changed at at 72.22 U.S. cents as of 9:56 a.m. Hong Kong time Friday.

“The most confident outlook we can have about the New Zealand dollar’s direction over the next two weeks is that its option volatility will remain high, and perhaps rise even further,” said Imre Speizer, a markets strategist at Westpac Banking Corp. in Auckland. “We cannot be confident about the New Zealand dollar’s direction.”

The South Pacific nation could experience slower economic growth if it elects a Labour-led government that seeks to reduce immigration, Standard Chartered Research economists said in a note this week. Both Labour and possible coalition partner New Zealand First want to cut immigration from record levels if they win, which would risk exacerbating a skills shortage and curbing growth, the Singapore-based analysts wrote.

“The New Zealand dollar has enjoyed a very low political risk premium over many years partly on the back of stable government and little political risk,” said Naeimi, who heads a dynamic investment fund at AMP Capital in Sydney. “That’s changing now.”

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