Hedge funds are increasing bets that the Australian dollar will outperform the New Zealand dollar through the end of the year, as stronger Australian inflation expectations revive the prospect of further Reserve Bank of Australia rate increases, according to a report by Bloomberg.
Trading in options on the Australian dollar-New Zealand dollar pair jumped to its highest level this year on Wednesday, with calls positioned for a stronger Aussie outnumbering puts by roughly three to one, according to Depository Trust & Clearing Corporation data.
The surge in activity followed hotter-than-expected Australian inflation, which prompted markets to increase expectations for another RBA tightening and drove the Australian dollar to its strongest daily gain against the kiwi since March.
The divergence in monetary policy expectations is giving the Aussie greater yield appeal, while uncertainty over the future remit of the Reserve Bank of New Zealand could add pressure to the kiwi.
Much of the demand has focused on options expiring in three to six months, covering a period packed with potential market-moving events including RBA policy meetings, New Zealand’s 7 November election and the US midterm elections, according to Weiss.
Australia’s stronger inflation data has led economists at major banks including Goldman Sachs and Commonwealth Bank of Australia to bring forward expectations for another RBA rate increase.
Interest-rate swaps are now fully pricing a 25-basis-point increase by November, while markets are assigning roughly even odds to a hike as soon as September.
That shift has strengthened the Australian dollar’s carry advantage and provided hedge funds with an additional reason to position for further gains against its New Zealand counterpart.
New Zealand presents a more complicated outlook. The country’s 7 November election could result in changes to the mandate of the RBNZ, potentially altering how policymakers weigh inflation against employment.
The opposition Labour Party has pledged to restore a dual mandate for the central bank if it wins, reversing the current emphasis on maintaining price stability.
The political uncertainty is already being reflected in currency derivatives markets. Three-month options on the New Zealand dollar have become more expensive as traders price in the possibility of a closely fought election and the potential implications for the RBNZ’s mandate.
