The New Zealand dollar’s four-month rally against its Australian counterpart may be poised for a short-term reversal as traders bet on a divergence in monetary policy between the two South Pacific nations, according to Citigroup Inc.
New Zealand’s currency, nicknamed the kiwi, has outperformed all of its 16 most-traded peers tracked by Bloomberg since the Reserve Bank of New Zealand cut its key interest rate a half-percentage point to 2.5 percent on March 10 following an earthquake in Christchurch, the nation’s second-largest city. The kiwi has surged 8 percent against Australia’s currency since the beginning of March.
“It appears either the RBNZ cut more aggressively than they needed to, or the economy has responded very quickly to the 50 basis point cut,” Andrew Cox, a currency strategist at Citigroup in New York, said in a telephone interview. “I think it’s the former.”
New Zealand’s dollar was little changed at NZ$1.2539 per Australian dollar at 3:08 p.m. in New York, compared with NZ$1.2540 yesterday. It traded at 85.62 U.S. cents after climbing yesterday to as high as 85.73 cents, a record.
The kiwi is now poised to pare its rally as investors speculate the RBNZ will raise rates while the Reserve Bank of Australia lowers its 4.75 percent benchmark, Todd Elmer, head of Group-of-10 currency strategy for Asia ex-Japan at Citigroup in Singapore, wrote today in a note to clients.
Investors should purchase three-week NZ$1.2950 one-touch options with a spot rate of NZ$1.2550, Citigroup said. A one-touch option pays out if the underlying asset reaches or exceeds a target level.
The difference between the two-year swap rates of Australia and New Zealand, a fixed payment made to receive floating rates that is sensitive to interest-rate expectations, has narrowed 86 basis points to 1.22 percentage point since early May, showing investors are expecting divergent policies from the central banks. A basis point is 0.01 percentage point.
Sydney-based Westpac Banking Corp. said July 15 that the Australian central bank will cut interest rates in December to address economic weakness.