[AndrewWoo]

Despite a positive local news flow - a more upbeat RBNZ Governor Bollard and PM Key and a significant upside surprise in retail sales data - the NZD is struggling to outperform other risky currencies such as the AUD. Uridashi bond redemptions rise significantly in July and could be holding the NZD back. RBNZ research suggests that while the exchange rate impact around the time of maturity tends to be small, the redemptions will likely weigh on the NZD in the run-up to the actual redemption dates (July 17, 27 and 28) as the market prices in the expected impact of the redemption flows.

Overall, the net outflows associated with the coming Uridashi redemptions will be small given that rollover rates have increased to 80% in recent months. So, Uridashi redemptions will ultimately have only a modest negative impact on the NZD. Market positioning may be the strongest factor holding the NZD back. CFTC data point to speculators holding their largest net long NZD/USD positions since February 2008. While this positioning is still only about 60% of its peak in mid 2007, the market is already long NZD. That said, the local data flow will likely remain NZD positive this week. Higher NZD oil prices generate upside risk to Thursday's Q2 CPI report. These data could help the NZD start to outperform the AUD.