Key Moments
- BNY observes a marked divergence in flows favoring AUD over NZD despite robust New Zealand soft commodity prices.
- Holdings in AUD and NZD have shifted from broad convergence in early February to a 40pp spread versus their 12-month rolling averages.
- BNY warns that if the AUD/NZD divergence feeds into spot, the RBNZ may be pushed toward a policy response via interest rates.
Flows Shift Toward AUD Despite Strong NZ Commodity Backdrop
BNY’s Head of Markets Macro Strategy Bob Savage underscores a widening gap between the New Zealand Dollar (NZD) and Australian Dollar (AUD) as investors concentrate on currencies linked to real assets. He notes that, even though New Zealand’s soft commodity prices are strong, NZD is attracting limited support from capital flows. By contrast, AUD is benefiting from terms-of-trade improvements and a reduction in hedging activity.
According to Savage, theoretical support for NZD from soft commodity gains is not materializing in observed client flows.
“In theory, the NZD should be able to benefit from any gains in soft commodities, but there is very little sign of this in our flows. Energy and fuel inputs will affect balance of payments as well, and NZD certainly does not have the underlying nominal or real rates that are a necessary condition for inflows.”
Policy Concerns Weigh on NZD as AUD Demand Rises
Policy expectations and inflation concerns are emerging as critical differentiators between the two currencies. Savage points out that market participants are wary about how far the Reserve Bank of New Zealand (RBNZ) can go in responding to inflation risks.
“If anything, there will be fears that the Reserve Bank of New Zealand (RBNZ) will not be able to move sufficiently with inflation risk, which was already in place before recent events. The markets show little interest for NZD for now, but the opposite is true for AUD.”
He characterizes both AUD and NZD as slow-moving in terms of cross-border positioning, yet the recent reallocation has been notable. Where holdings once appeared broadly aligned at the beginning of February, a substantial divergence has since emerged.
“These are two very slow-moving currencies in holdings terms (cross-border basis), but we have seen a change from broad convergence at the beginning of February to a spread of 40pp, measured by their current holdings as a percentage of their rolling 12-month averages.”
Trade-Weighted Impact and Inflation Considerations for New Zealand
The relative performance of AUD against NZD has implications beyond bilateral FX levels, particularly for New Zealand’s broader trade-weighted measures and inflation outlook.
“The AUD/NZD is material for New Zealand’s trade-weighted indices, and any large moves could impact the outlook for tradables inflation.”
Positioning data tracked by BNY reveals that asset owners have adjusted their hedging strategies in favor of NZD coverage while scaling back AUD hedges. Savage links this shift to differing central bank communication and the nature of the current commodity environment.
“Asset owners have materially reduced AUD hedges while adding NZD equivalents. The difference in policy rhetoric is sufficient to drive the change, while Australia also stands to benefit far more from the hard/soft commodity-based positive terms-of-trade shock.”
Potential RBNZ Policy Response if Divergence Hits Spot
Looking ahead, Savage warns that the current divergence in holdings could start to show up more clearly in spot pricing for AUD/NZD. If that occurs, it may force the RBNZ to reassess its stance.
“It seems that markets only have interest in adding to one of the two in exposures, and the choice was clear on multiple levels. If the divergence starts to translate into meaningful spot moves, the RBNZ may also need to look at a response through rates.”
Summary of Positioning Dynamics
| Aspect | AUD | NZD |
|---|---|---|
| Flow support | Benefiting from increased interest and reduced hedging | “Very little sign” of support despite strong soft commodities |
| Holdings vs 12-month average | Part of a 40pp spread versus NZD since early February | Part of a 40pp spread versus AUD since early February |
| Policy and inflation perception | Seen as favored, with policy rhetoric aiding demand | Concerns that RBNZ may not “move sufficiently with inflation risk” |
| Terms-of-trade exposure | “Stands to benefit far more from the hard/soft commodity-based positive terms-of-trade shock” |
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