AUD/NZD Set for More Losses as RBNZ Hawkish Stance Sparks Short Squeeze
By Aboki Forex —
The Australian dollar may fall further against the New Zealand dollar as traders unwind bearish bets on the kiwi after the Reserve Bank of New Zealand’s hawkish shift, analysts say.
Interest rate differentials between the two economies appear to have peaked. Any easing in Middle East tensions could provide an extra boost for the kiwi, according to Goldman Sachs Group Inc.
The RBNZ’s hawkish guidance last week triggered a short squeeze in the kiwi, especially against the Aussie, 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. Investors now bet 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 signalled a pause in rate hikes last month. Inflation came in softer than expected and cracks appeared 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 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.
Traders have pared bearish bets on the kiwi since a six-year peak last month. But short positions are yet to unwind to levels seen before the Iran war, according to Commodity Futures Trading Commission data.
Bullish wagers on the Aussie are hovering near the highest since February. That leaves scope for further declines in the AUD/NZD 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.”