Record Shorts Backfire in Australia

RBA signals that two years of interest-rate cuts, and push toward weaker currency, are at an end.

Traders who placed record bets against the Australian dollar are ruing their timing, after the central bank signaled two years of interest-rate cuts are at an end and stepped back from efforts to talk down the currency.

The Aussie traded at 89.10 U.S. cents as of 11:20 a.m. in Sydney. It jumped 2 percent yesterday, the biggest one-day gain since June, paring its past year’s drop to 14 percent. Reserve Bank (RBA) Governor Glenn Stevens left the benchmark borrowing cost at a record-low 2.5 percent, favored stable rates, and omitted mention of an “uncomfortably high” exchange rate that was in the previous two policy statements.

Stevens helped drive last year’s biggest slump in the Aussie since 2008, as policy makers spent the fourth quarter flagging the need for a weaker currency to rebalance the economy in speeches, interviews, and statements. Leveraged funds increased net positions betting on Aussie declines to 63,973 in the week ended Jan. 28, according to Commodity Futures Trading Commission (CFTC) data, the most in figures going back to June 2006.

“What we’re going to see is more capitulation of shorts,” or positions betting on Aussie declines, said Mitul Kotecha, the global head of foreign-exchange strategy at Credit Agricole Corporate & Investment Bank SA in Hong Kong. “The RBA’s statement was more hawkish than anticipated. The key here is that it’s going to be perceived as revealing an end to the easing cycle.”

 

Confidence Returning

Net wagers by asset managers on Aussie weakness have dropped to 5,495, from the record short of 44,954 in June last year.

RBA officials earlier blamed Federal Reserve stimulus policies for keeping the exchange rate stronger than was justified by the economy. Stevens said yesterday there are signs of better consumer demand and prospects for an expansion in housing construction, as well as referring to stronger-than-expected inflation. Prices in some suburbs of Sydney have surged as much as 27 percent in the past year, almost three times faster than the overall market.

A Jan. 22 report showed the trimmed mean measure of core prices rose 2.6 percent in the final three months of 2013 from a year earlier, above the middle of the central bank’s 2 percent to 3 percent target range. Data tomorrow will probably show retail sales grew 0.5 percent in December, in a sixth straight month of gains, according to the median forecast in a Bloomberg survey.

Commonwealth Bank of Australia and Macquarie Group Ltd. are among lenders predicting the central bank’s statement on monetary policy due Feb. 7 will contain an upward revision to inflation forecasts.

“On present indications, the most prudent course is likely to be a period of stability in interest rates,” Stevens said in a statement accompanying yesterday’s decision. “The exchange rate has declined further, which, if sustained, will assist in achieving balanced growth in the economy.”

He had said after the Nov. 5 policy decision that the Aussie was “uncomfortably high.” He repeated that language after the Dec. 3 central bank meeting, even after the currency had dropped by more than 4 percent in the intervening month. On Nov. 21, the RBA chief sent the currency skidding when he said policy makers won’t “always eschew” currency sales. Stevens cited 85 cents as his preferred level in an Australian Financial Review interview published Dec. 13.

 

RBA Neutral

“The RBA is both neutral on rates at the moment and neutral on the currency,” said David Forrester, a senior vice president for Group of 10 foreign-exchange strategy at Macquarie in Singapore. “Unlike last year, when we had both the RBA and the Fed driving the Aussie lower, this year it’s probably only going to be the Fed, so it’s going to be a tougher drive lower.”

Investors should consider selling the Aussie if it climbs toward its 50-day moving average near 89.30 U.S. cents, he said.

The odds of a further rate cut at the July meeting declined to 18 percent, from 23 percent at the end of last month, according to data compiled by Bloomberg. The difference between yields on two-year bonds and 10-year debt narrowed to 128 basis points yesterday, the least since July.

Gains in the Aussie may be capped as the nation contends with the end of a boom in resources investment. While the central bank omitted reference to discomfort with the currency, it remains concerned the economy will struggle during the transition from mining-led growth, according to Joseph Capurso, a Sydney-based strategist at CBA, the nation’s biggest lender.

“The RBA is not yet confident the economy will rebalance and is worried about non-mining business investment in particular,” Capurso said. “In the current environment of emerging-market concerns, we recommend selling the Aussie on rallies above 89.23 U.S. cents.”

The Aussie fell for a third-straight month in January, reaching a three-and-a-half-year low of 86.60 cents on Jan. 24, as the Fed decided to press on with a reduction in bond purchases that have buoyed higher-yielding assets globally. About $3 trillion has been wiped from global equities this year amid reports of slowing manufacturing growth in the U.S. and China and unrest in emerging markets from Thailand to Ukraine.

Analysts see the Aussie falling to 85 cents by year-end, down from a median forecast of 88 cents as recently as Jan. 1. There’s a 71 percent chance the currency will reach that level in the fourth quarter, up from 69 percent odds a month ago, according to options data compiled by Bloomberg.

The RBA is at least as concerned about communicating with households as with traders, and it doesn’t want to suggest to the first group that further cuts in borrowing costs are possible, according to Macquarie’s Forrester.

“Their first focus is to manage the economy, and they’re trading that off against communicating to the markets that they could be done on rates, and that’s giving the Aussie a pop,” he said.

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