Bank of America Recommends Shorting AUD/NZD on Divergent Central Bank Policy

Bank of America is advising clients to short the Australian dollar against the New Zealand dollar (AUD/NZD), citing a growing divergence in the expected monetary policy cycles of the two countries' central banks as a key catalyst.

Diverging Central Bank Outlooks

The recommendation is based on the bank's economic forecasts, which anticipate different paths for the Reserve Bank of Australia (RBA) and the Reserve Bank of New Zealand (RBNZ). BofA analysts believe the kiwi is currently under-owned and poised to benefit from this policy split.

According to a report from the bank, its economists project:

• The Reserve Bank of Australia will likely keep interest rates on hold until the second half of next year.
• The Reserve Bank of New Zealand, in contrast, is expected to deliver two more rate hikes this year.

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Structural Headwinds Add Pressure

Beyond monetary policy, Bank of America identified structural migration dynamics as a potential medium-term headwind for the currency pair. In a previous note from May 27, the bank highlighted that a widening tax gap between Australia and New Zealand could trigger a reversal of recent migration trends, weighing on the Australian dollar relative to the kiwi.

While acknowledging the Australian dollar's sensitivity to agricultural commodity prices, BofA strategists believe the combination of policy divergence and migration factors will exert more significant downward pressure on the AUD/NZD pair. The bank had previously recommended a bearish position on AUD/NZD via a put option spread in a report dated July 29.