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

The Aussie is poised to go into reverse as the Federal Reserve keeps raising interest rates, while the Reserve Bank of Australia 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 U.S. cents than 80 cents in 12 months.

The South Pacific currency has advanced for seven straight weeks as the U.S. 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 $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 percent this year as debt-laden households struggle with stagnant wages and inflation at the lower end of the central bank’s 2-to-3-percent target. Swaps traders are betting policy makers will tighten in the second half of this year.

The Aussie climbed to 81.36 U.S. cents on Friday, the strongest since May 2015. It was little changed Monday at 81.14 cents.

Not Sustainable

“The move up toward 80 cents has largely been driven by U.S. dollar weakness rather than Aussie dollar strength,” said Simon Doyle, Sydney-based head of fixed income and multi-asset at Schroder, which oversees about $540 billion. “We don’t see that as being something which is sustainable.”

Options traders are the most bearish on the Aussie among developed-market currencies, six-month risk reversals show. The premium investors paid for options giving the right to sell the Aussie versus the U.S. dollar, over those to buy, was about 47 basis points. Still, the gauge of bearishness has dropped from 165 basis points a year ago.

Underweight Aussie

Amundi Pioneer Asset Management, which oversees about $88 billion, is also underweight 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 iron-ore prices, a gradual but discernible deceleration in Chinese growth and widening interest-rate differentials in favor of the U.S. 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 19 basis points from as much as 61 basis points 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 U.S. dollar does from here,” Stein said. “But we will still like it here, as we do Aussie bonds.”

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 Aussie drops below 70 cents, according to Tony Bradley, a partner at hedge fund Hunter Burton Capital in Sydney.

“As the Fed hikes and U.S. 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.”

Source:
courtesy of BLOOMBERG

by Netty Idayu Ismail

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