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Debate Rages Between Hedge Funds and Banks Over Australian Dollar's Future

Hedge Funds' Short Bets on Aussie Dollar Clash with Major Banks' Optimism Amid Global Economic Shifts

By Alex P. Chase

5/15, 23:39 EDT

Key Takeaway

  • Hedge funds' short bets on the Aussie, driven by China's economic slowdown and interest rate gaps, are seen as risky by Australia's major banks.
  • Banks argue the negative outlook is priced in, predicting a rebound due to RBA's hawkish stance and signs of China's recovery.
  • Experts warn large short positions could lead to a sharp correction if unwound, with bullish forecasts suggesting the Aussie could strengthen to 73 US cents by year-end.

Divergent Views on the Aussie

The Australian dollar, a currency known for its volatility and sensitivity to global economic shifts, is currently at the center of a debate between hedge funds and Australia's major banks. Hedge funds are betting against the Aussie, with speculative wagers near a two-year high, driven by concerns over China's economic slowdown and geopolitical tensions in the Middle East. This bearish stance is further bolstered by Australia's interest rate gap with the United States, which stands at nearly one percentage point, encouraging short sellers.

Conversely, strategists from all four of Australia's largest banks argue that these bearish bets may not pay off. They suggest that much of the negative news has already been factored into the Aussie's current price. Both Westpac Banking Corp. and Commonwealth Bank of Australia highlight the Reserve Bank of Australia's (RBA) likely continuation of its hawkish monetary policy and signs of recovery in China's economic outlook as reasons for a potential rebound in the Aussie's value.

Rate Expectations and China's Influence

The debate over the Aussie's future is also influenced by expectations around interest rates and China's economic performance. Westpac and AMP Ltd. predict that the RBA will maintain its hawkish stance, especially after Australia's inflation rates exceeded forecasts in the first quarter, suggesting that interest rates may remain high until next year. This contrasts with the anticipated policy easing in the US and Europe, potentially narrowing the interest rate gap that has favored short sellers.

China's economic recovery, albeit uneven, is showing signs of acceleration with measures such as a 1 trillion yuan special sovereign bond sale and efforts to address the housing crisis. These developments could provide a tailwind for the Aussie, given the currency's sensitivity to China's economic health. Strategists note that while a declining yuan has pressured the Aussie, Beijing's control over its currency limits the downside, potentially setting the stage for a more stable trading environment.

Short Positions and Potential Reversals

The large short positions against the Aussie signal a strong bearish sentiment in the market. However, experts like Rodrigo Catril from National Australia Bank Ltd. and Carol Kong from Commonwealth Bank of Australia argue that this could lead to a significant reversal if these positions are unwound. They point to the currency's resilience and suggest that much of the negative news is already priced in, raising the risk of a sharp correction if market sentiment shifts.

The most bullish forecasts see the Aussie strengthening to around 73 US cents by year-end and 75 US cents in early 2025. However, the path to recovery may not be smooth, with potential risks including escalations in Middle East tensions, a global recession, or a renewed downturn in China's economy.

Street Views

  • Rodrigo Catril, National Australia Bank Ltd. (Bullish on the Australian dollar):

    "The size of the short position is telling us that many are pushing the Aussie down and yet it doesn’t want to go down, suggesting quite a lot of the bad news is in the price already... Unless there’s a large risk-off event, there could be a lot of pain ahead for those betting on the Aussie to fall."

  • Sally Auld, JBWere Ltd. (Neutral on shorting the Australian dollar):

    "Unless you think Australia and US monetary policy are going to diverge further — the RBA cuts, Fed hikes — I don’t think there’s huge value shorting the Aussie."

  • Carol Kong, Commonwealth Bank of Australia (Bullish on global and Chinese economic outlook affecting Australian dollar):

    "We expect the global and Chinese economic outlook to improve" and central banks to ease policy and support measures from Beijing to come through... For now, [short bets] look stretched, which raises the risk of a big reversal if speculators unwind their positions."

  • Mahjabeen Zaman, Australia & New Zealand Banking Group Ltd. (Bullish on Australian dollar):

    "Market positioning is really bearish but I think that points to some room for reversal." The currency may strengthen to 69 US cents this year.