Australian dollar’s rally bringing out the bears

by BLOOMBERG

SINGAPOREThe Australian dollar’s longest rally in 18 months is bringing out the bears.

The Aussie is poised to go into reverse as the US Federal Reserve (Fed) keeps raising interest rates, while the Reserve Bank of Australia (RBA) leaves borrowing costs at a record low, said James Athey at Aberdeen Standard Investments in London, who is adding to his short positions.

Schroder Investment Management Australia Ltd, which is also short, said the Aussie is likely to trade closer to 70 US cents (RM2.72) than 80 cents in 12 months.

The South Pacific currency has advanced for seven straight weeks as the US dollar has slumped and rising prices for commodities such as iron ore have bolstered the outlook for Australia’s exports.

“For now, it is tough to fight,” said Athey, a senior investment manager at Aberdeen, which oversees about US$810 billion.

“But in the medium term, the Australian economy does not welcome a stronger Australian dollar. Plus, I expect commodity prices to moderate.”

Both Aberdeen and Schroder predict the RBA will probably leave its benchmark at 1.5% this year as debtladen households struggle with stagnant wages and inflation at the lower end of the central bank’s 2%-3% target. Swaps traders are betting policymakers will tighten in the second half of this year.

The Aussie fell as much as 0.4% to 80.79 cents yesterday. It’s paring back an advance last week that took it to 81.36 cents last Friday, the strongest since May 2015.

Not Sustainable

“The move up toward 80 cents has largely been driven by US dollar weakness rather than Aussie dollar strength,” said Simon Doyle, Sydney-based head of fixed income and multi-asset at Schroder, which oversees about US$540 billion.

“We don’t see that as being something which is sustainable.”

Options traders are the most bearish on the Aussie among developedmarket currencies, six-month risk reversals show.

The premium investors paid for options giving the right to sell the Aussie versus the US dollar, over those to buy, was about 48 basis points (bps). Still, the gauge of bearishness has dropped from 165bps a year ago.

Amundi Pioneer Asset Management, which oversees about US$88 billion, is also ‘Underweight’ on the Aussie.

“The backdrop remains unproductive for sustained appreciation of the Australian dollar above 80 cents,” said Paresh Upadhyaya, a portfolio manager at Amundi Pioneer in Boston.

“There are three key headwinds facing the Aussie battler: Falling ironore prices, a gradual but discernible deceleration in Chinese growth and widening interest-rate differentials in favour of the US dollar.”

The Aussie has rallied over the past two months even as the nation’s yield premium has dwindled.

The extra yield on the nation’s 10-year bonds over similar-maturity Treasuries has shrunk to 17bps from as much as 61bps in September.

Eaton Vance Corp remains bullish on the Aussie as the nation’s economy is strong and will bolster expectations the RBA will hike, said Eric Stein, co-director of global fixed income in Boston.

“The exact level of the Aussie will depend a lot on what the broad US dollar does from here,” Stein said. “But we will still like it here, as we do Aussie bonds.”

Data due tomorrow will probably show that consumer prices in Australia advanced 0.7% in the fourth quarter, compared to a 0.6% increase in the previous three months.

While hedge funds and other large speculators increased their Aussie long positions to 25,725 contracts in the week ended Jan 23, the net bullish position is down from 86,204 at the end of August, data from the Commodity Futures Trading Commission show.

It’s only a matter of time before the currency drops below 70 cents, according to Tony Bradley, a partner at hedge fund Hunter Burton Capital in Sydney.

“As the Fed hikes and US rates overtake Australia’s, it will put pressure on the Aussie dollar, but the RBA doesn’t care,” Bradley said. “I am short and hope to be able to stay short for most of the year.” — Bloomberg