Investors and currency analysts have recently focused on Australia and New Zealand, believing that higher real yields will attract more money. However, as BNY’s macro strategist Geoff Yu points out, an increase in Antipodean holdings alone is insufficient to influence overall capital movement trends.
Real Yields: A step in the right direction, but not a game changer
Both the RBA and the RBNZ boosted interest rates, resulting in higher real yields. However, this has not resulted in sustained demand for cash bonds. Australia and New Zealand have some of the highest-rated government bonds in the APAC area, but they have not received the same level of inflows as in previous global carry trades. What should US investors take away? Real yield alone may not be sufficient; other major elements, such as fiscal health and foreign demand, are also critical.
APAC Linkage: Hedges Are More Than Hot Money
The flow alignment between the Australian dollar and the New Zealand dollar appears to be more related to hedge unwinding than new carry investments. As global volatility falls and hedges on cross-border bets reverse, money flows into these currencies rather than rotating. This means that U.S. portfolios must exercise extreme caution while buying and selling. When those hedging positions clear up, you may be able to observe clearer carry signals and greater trading opportunities.
Outlook for Inflation and Productivity
The RBA stated that productivity in Australia is slowing, which is why they opted to maintain rates unchanged. On the other hand, the RBNZ’s fiscal conservatism promotes real rate increases. However, low commodity prices reduce trade competitiveness, slowing any currency value increase. However, if tradables inflation falls, Australia and New Zealand should benefit from increased external demand, which could be advantageous for long-term currency policy.
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