Hedge funds favour Aussie over kiwi as RBA hike bets build ahead of NZ election

Hedge funds are leaning towards betting on the Australian dollar overtaking the New Zealand dollar by year-end, driven by stronger Australian inflation expectations fueling potential Reserve Bank of Australia rate hikes, according to Bloomberg. The volume of options traded on the Australian dollar-New Zealand dollar pair hit a yearly high on Wednesday, with calls for a stronger Aussie outnumbering puts by nearly three to one, as per Depository Trust & Clearing Corporation data.

This surge in activity came after Australian inflation proved warmer than forecasts, prompting markets to heighten expectations for another RBA tightening and sending the Aussie dollar soaring to its strongest daily gain against the kiwi since March. The discrepancy in monetary policy expectations is boosting the Aussie's yield appeal, while uncertainty surrounding the future mandate of the Reserve Bank of New Zealand could add pressure to the kiwi.

Most of this demand has centered on options expiring within three to six months, covering a busy period filled with market-moving events such as RBA policy meetings, New Zealand’s 7 November election, and the US midterm elections, as per Weiss. Australia's upsurge in inflation data has prompted economists at major banks like Goldman Sachs and Commonwealth Bank of Australia to anticipate another RBA rate increase sooner.

Interest-rate swaps now fully price in a 25-basis-point hike by November, with markets assigning roughly equal odds to a September hike. This shift has bolstered the Australian dollar's carry advantage, providing hedge funds with another reason to position for further gains versus the New Zealand dollar. New Zealand's situation is more complex.

The upcoming 7 November election could lead to changes in the Reserve Bank of New Zealand's mandate, potentially reshaping policymakers' approach to balancing inflation and employment. The opposition Labour Party has vowed to reinstate a dual mandate for the central bank if victorious, reversing the current focus on preserving price stability.

This political uncertainty is already reverberating in currency derivatives markets. Three-month options on the New Zealand dollar have become pricier as traders factor in the likelihood of a tightly contested election and the potential ramifications for the RBNZ's mandate.