Option Traders Bet on Aussie Outshining Kiwi as Trade Fears Ebb

The Australian dollar (AUD) has quietly edged higher against the New Zealand dollar (NZD) in recent weeks, with option traders positioning for a sustained outperformance as U.S.-China trade tensions ease. Amid reduced tariff threats and a weakening U.S. dollar, the AUD/NZD pair has climbed to a two-month high of 1.11, signaling a shift in risk sentiment toward the region’s two major commodity-linked currencies.

Trade Tensions Ebb, Risk Appetite Returns

The recent de-escalation in U.S.-China trade disputes has been the primary catalyst for the AUD/NZD’s rebound. While tariffs remain a concern, the postponement of additional levies (e.g., on pharmaceuticals and semiconductors) until July 2025 has eased immediate volatility. This has emboldened risk-on investors, with AUD/NZD gaining 3.8% since mid-April as traders bet on improved global trade flows.

Central Bank Policies: A Tale of Two Cuts

Both the Reserve Bank of Australia (RBA) and Reserve Bank of New Zealand (RBNZ) are expected to cut rates in early May, but the AUD appears better insulated from the negative effects of easing.

• RBA’s May 20 meeting: A 25-basis-point cut is all but priced in, with economists predicting further reductions by August. However, Australia’s stronger commodity exports (e.g., iron ore prices holding above $140/tonne) and its status as China’s top trade partner provide a floor for the AUD.
• RBNZ’s May 28 meeting: A 25-basis-point cut is also anticipated, but New Zealand’s economy faces deeper headwinds. Weak labor data (unemployment at 4.2%) and China’s reduced dairy demand have kept the NZD vulnerable.

Commodity and USD Dynamics

The AUD’s edge over the NZD is amplified by its direct link to global commodity prices. Iron ore, a key Australian export, has stabilized near $145/tonne, supported by China’s infrastructure spending plans. Meanwhile, New Zealand’s dairy prices remain stagnant due to U.S.-China trade spillover effects.

The U.S. dollar’s decline—driven by falling Treasury yields and investor flight from U.S. assets—also favors the AUD. The DXY index has dropped 7.6% since March, providing a tailwind for risk-sensitive currencies.

Technical Outlook: AUD/NZD Eyes 1.12 Resistance

Technically, the pair faces resistance at 1.12 (the 2025 high) and 1.13 (a psychological level). A break above 1.12 would signal a return to the 2024 range of 1.14–1.15. Key supports include 1.09 (the 2025 average) and 1.08 (the April low).

Risks to the Rally

• Trade Setbacks: A hardening of U.S. tariffs (e.g., on semiconductors) or a collapse in China’s fiscal stimulus could reignite risk-off sentiment.
• Commodity Slump: A sharp drop in iron ore prices below $130/tonne or dairy prices could reverse the AUD’s gains.
• Central Bank Disappointment: If the RBA’s rate cuts are more aggressive than expected, it could undermine the AUD’s short-term momentum.

Conclusion: AUD Outperformance Looks Sustainable

The AUD/NZD’s rally reflects a confluence of factors: trade optimism, commodity stability, and U.S. dollar weakness. With option traders accumulating call options on AUD/NZD at strike prices above 1.12, the market is pricing in further upside.

Key data points support this view:
- AUD/USD projections for Q2 2025 range between 0.62–0.64, with a rebound to 0.66 likely by early 2026 if trade tensions ease.
- NZD/USD, meanwhile, faces downside risks to 0.58, with recovery to 0.62 contingent on global growth stabilizing.

Investors should consider:
1. Long AUD/NZD positions with stops below 1.09.
2. Out-of-the-money call options targeting 1.15.
3. Monitoring central bank meetings and commodity price trends for confirmation.

The Aussie’s edge over the Kiwi is no fluke—it’s a bet on commodities, trade normalization, and the U.S. dollar’s decline. Stay long, but keep an eye on the tariff horizon.

Final Note: As of May 2025, the AUD/NZD’s 2025 average stands at 1.098, with traders now aiming to push it back toward 1.15—a level last seen in early 2024. The path of least resistance remains higher, but the journey won’t be smooth.