A $141 Billion Manager Shorts Kiwi, Buys Aussie on Rates Bet

(Bloomberg) -- It’s time to get out of New Zealand’s currency, according to AMP Capital Investors Ltd. Instead, go long the Australian dollar on bets that the nation’s economy will outperform its neighbor across the Tasman Sea.

The premium that New Zealand’s bonds trade at over Australia is the narrowest it’s been, while in the case of 10 years it’s evaporated, according to Nader Naeimi, who heads a dynamic investment fund at AMP Capital. Real yields will likely dictate where the currencies are heading in the absence of central bank moves, he said.

While the central banks in both countries are seen holding down record-low policy rates this year, price pressures in Australia may be picking up at a faster pace than in New Zealand as it benefits from a rebound in the prices of iron ore exports. The benchmark 10-year Aussie yield rose above its kiwi peer last week for the first time since 2012.

“Another carry trade bites the dust,” said Naeimi, who helps oversee A$188 billion ($141 billion) in assets. AMP Capital is taking long Aussie positions against the New Zealand dollar, he said.

A $141 Billion Manager Shorts Kiwi, Buys Aussie on Rates Bet

The New Zealand dollar rose 7.1 percent against the Aussie from its October low to a mid-April high. It has slipped around 1.5 percent since then.

Westpac Banking Corp. similarly added to its kiwi dollar shorts while exiting short positions on the Aussie. The bank cited steadier iron ore prices and firmer risk appetite across global markets as factors underpinning its Aussie trade, while a “steady loss of yield support” is fueling its kiwi short position.

Record Low

With New Zealand’s inflation hovering near the bottom of a 1 percent-3 percent target range, its central bank has signaled it’s unlikely to raise interest rates until mid-2019. The Reserve Bank of Australia raised its underlying CPI forecast to 2 percent for 2018, and has said tighter policy is needed at some point.

Australian 10-year bonds are yielding about 2.79 percent, on par with New Zealand notes of equivalent tenor, according to data compiled by Bloomberg.

An improving government balance sheet in Australia is also helping bolster the appeal of Aussie debt, he said. The government forecast a A$2.2 billion surplus in fiscal 2020, a year ahead of schedule, in its budget on Tuesday. “Money is likely to shift into Australia bonds from New Zealand bonds.”

©2018 Bloomberg L.P.