Hedge funds back Aussie over kiwi as RBA hike odds rise

Hedge funds have increased purchases of AUD/NZD options, positioning for the Australian dollar to outperform the New Zealand dollar after stronger-than-expected Australian inflation and ahead of New Zealand’s Nov. 7 election.

Trading in options on the AUD/NZD pair reached its highest level this year, with calls that profit from a stronger Australian dollar outnumbering puts by about three to one, according to Depository Trust & Clearing Corporation data. The surge followed an inflation report in Australia that pushed the currency to its biggest one-day gain against the New Zealand dollar since March.

Recent Australian inflation figures led economists at major banks, including Goldman Sachs and Commonwealth Bank of Australia, to bring forward forecasts for additional Reserve Bank of Australia tightening. Interest-rate swaps are fully pricing a 25 basis-point increase by November and show roughly even odds of a move as soon as September. The higher expected yields on Australian debt have increased the carry advantage for the Australian dollar.

New Zealand faces political uncertainty ahead of the Nov. 7 general election. The opposition Labour Party has pledged to restore a dual mandate for the Reserve Bank of New Zealand if it wins, which would formally balance inflation and employment objectives. Traders have reacted by bidding up three-month options on the New Zealand dollar as they price in a close vote and the potential implications for monetary policy.

Much of the options demand has focused on three- to six-month expiries, covering several Reserve Bank of Australia meetings, New Zealand’s election and the U.S. midterm elections. Market participants have also taken directional positions in forwards and swaps to capture relative rate moves and event-driven volatility.

Markets will monitor upcoming inflation readings and central bank policy meetings in both countries, along with the Nov. 7 election, for signals that could affect interest-rate expectations and currency flows.