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Hedge funds pile into Aussie over kiwi as RBA hike bets rise

Options on the AUD-NZD pair hit their highest level this year, with calls outnumbering puts by about 3 to 1 through year end.

Reported · Written up by our desk · Fund Industry

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 have revived the prospect of further Reserve Bank of Australia rate increases, according to Bloomberg as cited by Hedgeweek.

Trading activity in AUD-NZD options has accelerated, with calls positioned for a stronger Aussie outnumbering puts by roughly three to one and options activity reaching its highest level this year on Wednesday, based on Depository Trust & Clearing Corporation data. The move followed hotter-than-expected Australian inflation, which pushed markets to raise expectations for more RBA tightening and helped lift the Australian dollar’s strongest daily gain versus the kiwi since March.

Hedgeweek reports that the divergence in monetary policy expectations is improving the Aussie’s yield appeal, while uncertainty around the future mandate of the Reserve Bank of New Zealand could weigh on the kiwi. Demand has largely focused on options expiring in three to six months, a window that includes RBA policy meetings, New Zealand’s 7 November election, and US midterm elections.

In New Zealand, the 7 November election could change the RBNZ mandate, potentially shifting how policymakers balance inflation and employment. Hedgeweek notes that three-month options on the New Zealand dollar have become more expensive as traders price the possibility of a tight election and the potential implications for the RBNZ’s mandate.

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