Hedge Funds Get Aussie Bets Wrong Second Time: Australia Credit

Apr 28, 2014 9:54 pm ET

April 29 (Bloomberg) -- Money managers and hedge funds mistimed the Australian dollar for a second time this year.

Commodity Futures Trading Commission data show the most- bullish six-week change to Aussie positions in more than 1 1/2 years over the period to April 22, just in time to catch a slump that made the local dollar the past week’s worst performer among 10 currencies tracked by Bloomberg Correlation Weighted Indexes. Earlier this year, futures traders were forced to abandon near record bets on declines when the Aussie rallied from the 3 1/2- year low reached on Jan. 24.

“The Aussie is in a steady range and, rather typically, short-term money is getting poorly positioned at both ends of the ranges,” said Hugh Killen, Westpac Banking Corp.’s Sydney- based global head of foreign exchange. “The market has got itself long at relatively unattractive levels and we could see a further sell-off as a result.”

The local dollar slid 0.7 percent in the past week against other major peers, the Bloomberg indexes show, after an April 23 report showing subdued inflation eroded bets the central bank will increase rates this year. The currency will probably fall to 88 U.S. cents by year-end from 92.96 cents as of 5 p.m. in Sydney yesterday, according to the median of forecasts compiled by Bloomberg.

The difference in the number of wagers by hedge funds and other large speculators on an advance in the Aussie compared with those on a drop -- so-called net longs -- was 16,370 on April 22, the most since April 2013 and compared with net shorts of 40,850 in the period ended March 11.

Consensus Trade

The Aussie reached 86.60 cents on Jan. 24, the least since July 2010. Four days later, bets on declines in the currency were at 65,723, near the 76,779 record for shorts set in August, CFTC data show. The exchange rate reversed, touching a five-month high of 94.61 cents on April 10, after unemployment unexpectedly fell from a decade high in March. Trade and home loan figures also beat analysts forecasts, prompting speculation about when the central bank would raise record-low benchmark rates.

The Citigroup Economic Surprise Index for Australia, which shows whether economic data are beating or lagging behind expectations, climbed to a 21-month high on April 15.

Declining exchange-rate swings also strengthened the allure of high-yielding Australian assets, said Ray Attrill, global co- head of currency strategy at National Australia Bank in Sydney.

One-month volatility for the Aussie fell to 6.61 percent on April 25, the least in a year.

Volatility Base

“The risk now is that volatility won’t go any lower, the U.S. dollar will rise and some people are perhaps getting into the long Aussie dollar trade at the top of the market,” Attrill said yesterday. “If the market comes around to the view that the RBA is on hold for at least a year, then that would take a little bit of strength out of the Aussie as well.”

Bets that the RBA will raise its 2.5 percent benchmark in October dropped to about 6 percent yesterday from 34 percent on April 22. Wagers evaporated after a government report last week showed the trimmed mean gauge of core consumer prices rose 0.5 percent in the first quarter from the previous three-month period, matching the slowest pace in two years and less than the 0.7 percent gain projected by a Bloomberg survey.

The nation’s two-year bond yields fell to 2.72 percent yesterday from a year-high of 2.91 percent on March 13. The 10- year rate was at 3.93 percent from 4.08 at the end of March.

The Aussie “has been difficult,” said Divya Devesh, a Singapore-based foreign-exchange analyst at Standard Chartered Plc, which predicts the currency will drop to 88 cents by mid- year and recover to 90 by year-end.

“Short Aussie was the big consensus trade for the year, which clearly didn’t play through in the first quarter,” he said yesterday. “It’s probably already formed a top in the 94 to 95 range and the market will again be looking to put in shorts to look for any downside surprises.”