Market News

(Bloomberg) -- The Australian dollar may have further scope to fall against the kiwi as traders unwind bearish positions in New Zealand’s currency following a hawkish shift from the nation’s central bank, analysts said.

Interest-rate differentials between the two economies appear to have peaked, while any easing in Middle East tensions may provide an additional tailwind for the kiwi, according to Goldman Sachs Group Inc. The Reserve Bank of New Zealand’s hawkish guidance last week has also sparked a short squeeze in the currency, particularly against the Australian dollar, strategists at Barclays Plc said.

“At this juncture, we think risk-reward in short AUD/NZD is appealing from a relative data and policy perspective,” Goldman strategists led by Kamakshya Trivedi wrote in a note on Friday. “The impetus for a more meaningful correction lower in the cross is building.”

New Zealand policymakers are weighing how quickly higher fuel costs may feed into broader inflation, with investors now betting officials will have enough evidence by July to begin a tightening cycle with a quarter-point rate increase. In contrast, the Reserve Bank of Australia signaled a pause in rate hikes last month before inflation came in softer than expected and cracks started to appear in the local jobs market.

The Australian dollar fell 1.6% against the kiwi in May, its biggest monthly decline in more than a year, as the respective central bank outlooks diverged. RBNZ Assistant Governor Karen Silk said all options remain on the table, including a 50-basis-point increase in the cash rate.

While traders have pared bearish bets on the kiwi since a six-year peak last month, short positions are yet to unwind to levels seen before the Iran war, according to Commodity Futures Trading Commission data. At the same time, bullish wagers on the Aussie are hovering near the highest since February, leaving scope for further declines in the Aussie-kiwi cross as kiwi shorts are covered and crowded Aussie long bets unwind.

“The hawkish guidance generated a sizable squeeze of legacy short positions, spilling over to Aussie and AUD/NZD as one of the most popular longs of late,” Barclays strategists including Audrey Ong wrote in a note. “From a tactical standpoint, there is some scope for AUD/NZD to weaken further before it fully closes the gap to rates.”