Bets for AUD upside grow, says CitiAUD rallies against AUD, flat against GBPRBA minutes hint more hikes might be needed

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The Australian Dollar is the darling of the global FX community, according to one of the world's largest foreign exchange dealers that has seen a meaningful pickup in demand for the currency.

Citi says foreign exchange options flow all point to chasing further Australian Dollar gains, with the New Zealand Dollar and Euro also favoured.

"There are times when changes in FX option skew largely appear to be fueled by moves in spot, but when we see it come with large volumes, we take notice," says Stephen Spratt, an analyst at Citi.

Citi's take is that the broad softening in the U.S. Dollar has moved skew in favour of USD puts everywhere. By buying puts in a currency, an investor is opening bets for further downside.

The counterparty to this trade is important as it signals where investors see the most potential upside. In this regard, "strong volumes were only evident in AUD, NZD and EUR, suggesting these are the favoured spots for investors to chase the move," says Spratt.

"Despite similar moves in JPY and GBP risk reversals, the move has not been backed by volumes in the same way," he adds.

Citi's option desk says the Australian Dollar is its favoured G10 vehicle to play for the softer USD theme.

"The signs of investors chasing in AUD and EUR align with the views of our Citi FX Strategy team. The team have been bullish AUD for a while, targeting a move through the multi-month range highs around 0.6511-0.6522 and then the 200d MA at 0.6615," says Spratt.

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The Australian Dollar to U.S. Dollar exchange rate is currently quoted at 0.6575, some 0.30% higher on the day. Boosting the Aussie Dollar is the ongoing USD selloff linked to the belief the next move from the Fed will be a rate cut.

Meanwhile, the Pound to Australian Dollar is mainly flat at 1.9053, as markets consider that the next move from the Reserve Bank of Australia could be a hike.

This was after the release of the RBA's minutes detailing the decision to raise interest rates at its last meeting.

The minutes revealed that the Reserve Bank of Australia had discussed a fifth consecutive pause for the November meeting but opted for a hike to 4.35% instead.

Policymakers noted that the risk of not achieving the 2-3% inflation target had increased.

Forecasts showing this goal should be reached by the end of 2025 were based on one or two more rate rises, the minutes said.

Australian money markets only see a 30% chance of another hike to 4.6%, which suggests some scope for further hikes to be 'priced in', potentially boosting AUD.

"Even a modest further increase in inflation expectations would make it significantly more challenging and costly to return inflation back to target within a reasonable timeframe," said the minutes.

"In other words: a hike now is needed to prevent more aggressive tightening later. The Aussie dollar this morning briefly rose to the highest level since August on USD weakness before paring gains again. AUD/USD is currently trading around 0.656," says Mathias Van der Jeugt, an analyst at KBC Bank.