Tuesday, December 8, 2015

Kiwi hovers while awaiting interest rate decision | Short-sellers smell US shale oil producer blood

The New Zealand dollar against the U.S. dollar (NZDUSD), otherwise known as the Kiwi, is hovering above a key technical indicator, the 200 period exponential moving average (EMA) on the four hour chart (see above). This is as the market awaits the latest monetary policy report and interest rate decision from the Reserve Bank of New Zealand (RBNZ) later in the global day, or early morning tomorrow in GMT terms.

In the financial stability report issued on November 11th, the governor of the RBNZ, Graeme Wheeler, identified three factors that were influencing monetary policy decisions at his institution. These were global financial stability, for which read the situation in China, on which nation New Zealand is dependent for its exports of dairy products; the pressures on the same dairy sector, and in particular the hardship being faced by over-indebted dairy farmers; and the runaway housing market in the major cities, Auckland in particular.

These represent competing forces in terms of interest rate drivers. On the one hand the government would like to reduce rates to lower the value of the currency as an aid to exports, and to reduce the pressure on indebted farmers, but on the other hand are greatly fearful of a housing bubble, which is a motivator for keeping rates high.

After three reductions in the Official Cash Rate (OCR) so far this year, the decision to make a further one on this occasion rests on a knife-edge.

Short-sellers smell US shale oil producer blood

Yesterday we alluded to the efforts being made by Middle-east oil producers, and Saudi Arabia in particular, to kill off if possible the threat to their domination of the oil market being posed by shale oil producers in the U.S. They are doing this by relying on their cash reserves to allow them to further lower prices by keeping production up. This, they hope, will place shale oil producers in a loss-making position, leading to their demise.

Now an article in the “The Australian” (“Shorters line up with OPEC to kill off US shale oil”), by Robert Gottliebsen, has it that short sellers have joined the fray. According to the article, hedge funds have now created an extremely large overhang of short positions in oil futures in what it characterises as “ … one of the biggest shorting raids in history”.

Not content with selling oil futures, the hedge funds are also said to be selling oil company and other mineral producer shares. Could all of this be setting up a major contrarian opportunity when and if the shorters are forced, for whatever reason, to cover their positions?

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